Tag Archives: Stocks

A Stock’s Price vs. a Company’s Intrinsic Value

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“Stock prices fluctuate unpredictably.  But company values stay relatively steady.” Kenneth Jeffrey Marshall,

Value investing is one of the most popular ways to find great stocks in any market environment. Value investing represents an approach to investing, where investors evaluate the fundamentals or intrinsic values of companies rather than estimating the future market prices of stocks. The definition of a value stock, for our purposes, is a stock that is underpriced by the market or due to volatility relative to its worth or fundamentals.

Value investing is about finding stocks that are either flying under the radar and are compelling buys, or offer up tantalizing discounts when compared to fair value (or intrinsic value). According to Investopia, intrinsic value is a measure of what an asset is worth. In short, it’s the underlying value of a company and its cash flow.

The idea of value investing involves purchasing great stocks of companies priced by the market well below their intrinsic values, which can give investors a margin of safety. The margin of safety comes from buying good companies at cheap prices. It comes from buying good companies that you understand, and to do so at a discount to companies estimated intrinsic value. That discount is where the margin of safety comes from.

Great stocks shouldn’t get cheap. But sometimes they are.

Value investing also allows traders to detach from their emotions of fear and greed when stock prices fluctuate. It enables them to hold the stocks for long-term rather than buying and selling if they’re feeling wildly optimistic or pessimistic because of stock price and market volatility.

Price and value differ:

  • Price is what something can be purchased or sold for at a given time. Price fluctuates.
  • Value is what something is worth, it fluctuates less.
  • Identify the right price at which to buy stock
  • Hold quality stocks fearlessly during market swings

Value investors understand that over time, the market price of a stock will converge with its actual fundamental worth or intrinsic value. But at a single point in time, it may not. And those single points are enough to purchase good companies cheap or below its intrinsic value.

Value investors also understand that there always comes a time when glamorous businesses stop getting priced like rock stars, and start getting priced like businesses.

Over time, the average price of an asset does converge to the average worth of that asset. But in the short term they can be wildly different, since stock prices fluctuate unpredictably.  But company values stay relatively steady.  This insight is the basis of value investing, according to Kenneth Jeffrey Marshall, author of the investing book, “Good Stocks Cheap: Value Investing with Confidence for a Lifetime of Stock Market”.

The occasions when a stock price is far away from a company’s intrinsic value is when a patient value investor acts.

Value investing is buying companies for less than they’re worth…their intrinsic value. According to the Kenneth Jeffery Marshall, professor, value investor, and the author of “Good Stocks Cheap”, best value investing procedures to utilize include:

  • Do you understand the company
  • Is it a good company:
    • Has it been historically good
    • Will it be good in the future
    • Is it shareholder friendly
  • Is the stock price cheap or at what price will the company’s stock become cheap (margin of safety)

The secret of successful investing: Staying invested and patience. Stock prices can be volatile and can fluctuate unpredictably in the short term.  But the intrinsic values of companies stay relatively steady. Thus, you should chose to invest in companies selling for less than they are worth (intrinsic value) and not over pay for a company.

One way to find companies is by looking at several key metrics and financial ratios, many of which are crucial in the value stock selection process. There are several key metrics that value investors look at, which include:

  • Price to Earnings Ratio (PE). PE shows you how much investors are willing to pay for each dollar of earnings in a given stock. The best use of the PE ratio is to compare the stock’s current PE ratio with: a) where this ratio has been in the past; b) how it compares to the average for the industry/sector; and c) how it compares to the market as a whole.
  • Price/Sales ratio. P/Sales compares a given stock’s price to its total sales, where a lower value is generally considered better. This metric is preferred more than other value-focused ones because it looks at sales, something that is far harder to manipulate with accounting tricks than earnings. The best use of P/S ratio to compare it to the S&P 500 average. Also, you can evaluate the trend of the stock’s P/Sales over the past few years.
  • Price/Earnings to Growth ratio (PEG). PEG ratio is another great indicator of value. PEG ratio is a stock’s price-to-earnings (P/E) ratio divided by the growth rate of its earnings for a specified time period. The PEG ratio is used to determine a stock’s value while also factoring in the company’s expected earnings growth, and it is thought to provide a more complete picture than the more standard P/E ratio. A lower PEG may indicate that a stock is undervalued.

The reality is that some of your selected stocks will lose money. That’s why it is important to diversify your investments, so that losses in a stock may be outweighed by gains in other stocks.

Strength of value investing

Deep value factors, such as book-to-price or tangible book-to-price, usually rally first, when actual levels of rates are still low, says Boris Lerner, Global Head of Quantitative Equity Research. Other value factors, such as earnings yield or free-cash-flow yield, tend to pick up later, as rates rise above trend.

Rising interest rates are the primary reason value investing has staying power. When inflation and rising interest rates are trending higher, it can clip the wings of pricey growth stocks, whose valuations are predicated on future returns, which make pricier growth stocks less appealing. When rates go up, it instantly raises the bar on far-out profits needed to justify today’s stock prices.

Because value names are typically mature companies with valuations based on current cash flow, rising rates don’t have the same impact. At the same time, many traditional value sectors, such as financials, directly benefit from rising rates.

Put the strength of value investing to work for you. In a nutshell, the basic tenet of value investing is paying less for a company than its worth.

  • References:
  1. https://growthwithvalue.com/wp-content/uploads/2020/12/Good-Stocks-Cheap-Book-Summary.pdf
  2. https://finance.yahoo.com/news/10-cheap-value-stocks-buy-140144393.html
  3. https://www.entrepreneur.com/article/397977
  4. https://www.morganstanley.com/ideas/value-stocks-forecast-2021
  5. https://www.gurufocus.com/news/949267/interview-holding-stocks-forever-with-professor-kenneth-jeffrey-marshall

Kenneth Jeffrey Marshall teaches value investing in the Masters in Finance program at the Stockholm School of Economics in Sweden, and at Stanford University. He also teaches asset management in the MBA program at the Haas School of Business at the University of California, Berkeley. Marshall is a past member of the Stanford Institute for Economic Policy Research; he taught Stanford’s first-ever online value investing course in 2015. He earned his MBA at Harvard Business School.

Nearly 22 Million Americans are Millionaires

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There are nearly 22 million individuals in the U.S. with financial and real assets to fit the definition of being a millionaire, according to a 2021 Credit Suisse Global Wealth Report. Overall in 2020, total global wealth grew by 7.4% and wealth per adult rose by 6% to reach another record high of USD 79,952, according to the report.

Net worth, or “wealth,” is defined as the value of financial assets plus real assets (principally housing) owned by households, minus their debts.

The core reasons for asset price increases which have led to major gains in household wealth are a result of significant monetary and fiscal intervention by governments and central banks, like the U.S. Federal Reserve. Many governments and central banks in more advanced economies have taken pre-emptive action to prevent an economic recession in two primary ways: first, by organizing massive income transfer programs to support the individuals and businesses most adversely affected by the pandemic, and second, by lowering interest rates – often to levels close to zero – and making it clear that interest rates will stay low for some time.

There is little doubt that these interventions have been highly successful in meeting their immediate objectives of countering the economic impact of the pandemic. However, they have come at a cost. Public debt relative to GDP has risen in the U.S. and throughout the world by 20 percentage points or more, according to a 2021 Credit Suisse Global Wealth Report.

In essence, there has been a huge transfer from the government coffers to household net worth, which is one of the reasons why household wealth has been so resilient. In one respect, these transfers generously compensated households.

Generous payments have meant that disposable household income has been relatively stable and has even risen. In combination with restricted consumption opportunities, this has led to a surge in household saving, which has inflated household financial assets and caused household debts to be lower than they would be otherwise. This increase in savings was an important source of household wealth growth last year.

The lowering of interest rates by central banks has probably had the greatest impact on the growth in household wealth. It is a major reason why share prices and house prices have flourished, and these translate directly into our valuations of household wealth.

However, there are inflation implications in the long term from lowering the interest rates and also increased equity market volatility linked to expected future rises in interest rates. However, these were deemed relatively unimportant at the time compared to the more immediate economic challenges caused by the pandemic.

Household wealth appears to have simply continued to grow, paying little or no attention to the economic turmoil that should have hampered progress. Effectively, financial assets accounted for most of the gain in total household wealth accumulation.

The wealth of those with a higher share of equities among their assets, e.g. wealthier households in general. And, home owners in most markets, on the other hand, have seen capital gains due to rising house prices.

Wealth is a key component of the economic system. It is used as a store of resources for future consumption, particularly during retirement. Wealth also enhances opportunities when used either directly or as collateral for loans. But, most of all, wealth is valued for its capacity to reduce vulnerability to shocks such as unemployment, ill health, natural disasters or indeed a pandemic.

The contrast between those who have access to an emergency buffer and those who do not is evident at the best of times. Household wealth has played a crucial role in determining the resilience of both nations and individuals

Roughly 1% of adults in the world are USD millionaires.

Global household wealth may well have fallen. But aggressive governments and central banks to intervene help mitigate the economic impact of the pandemic. These have led to rapid share price and house price rises that have benefited those in the upper wealth echelons. In contrast, those in the lower wealth bands have tended to stand still, or, in many cases, regressed. The net result has been a marked rise in inequality

In many countries, the overall level of wealth remains below levels recorded before 2016. Some of the underlying factors may self-correct over time. For example, interest rates will begin to rise again at some point, and this will dampen asset prices.

References:

  1. https://www.cnbc.com/2021/12/22/heres-how-22-million-americans-became-millionaires.html
  2. https://www.credit-suisse.com/media/assets/corporate/docs/about-us/research/publications/global-wealth-report-2021-en.pdf
  3. https://www.credit-suisse.com/about-us/en/reports-research/global-wealth-report.html

Inflation: The Elephant in the Room

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November’s CPI report showed consumer prices rising at rates last seen four decades ago.

Inflation is the biggest risk facing the equity market and is likely to end the record long bull-market. Inflation has a long history of eroding the value of financial assets and brings with it higher interest rates as central bankers try to tamp it down.

The annual inflation rate accelerated significantly in 2021, from about 0.5% at the start of the year to over 3% by September. This was driven by increased demand as the economy reopened and by a sharp rise in energy prices, among other factors.

In October, inflation measured by the consumer price index was up 6.2% from a year earlier, the highest annual rate since November 1990. It marked the sixth straight month above 5%. Kiplinger expects inflation to hit 6.6% by year-end 2021 before falling back to 2.8% by the end of 2022 – above the 2% average rate of the past decade.

“Inflation is in the air, and it risks becoming a market issue, an economic issue and a political issue,” says Katie Nixon, chief investment officer at Northern Trust Wealth Management.

As we enter 2022, inflation is expected to remain a risk amid higher food and gas prices, rising pressures from non-energy industrial sectors such as steel and chemicals, higher food and consumer goods prices, and increases in the energy prices.

Economists expect headline CPI to peak between 4.5% and 5% in the first half of 2022 and approach 2.5% year over year by the end of 2022.

References;

  1. https://www.kiplinger.com/investing/stocks/stocks-to-buy/603814/where-to-invest-in-2022
  2. https://investor.vanguard.com/investor-resources-education/article/simple-strategies-for-reducing-inflation-risk

Beat Inflation with Dividend Stocks | Fidelity Viewpoints

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“Stocks that can boost dividends during periods of high inflation may outperform.” Fidelity Viewpoints

Key takeaways according to Fidelity Viewpoints

  • Dividends aren’t just nice to have, they’re essential to the stock market’s return—accounting for approximately 40% of overall stock market returns since 1930.
  • During periods of high inflation, stocks that increased their dividends the most considerably outperformed the broad market, on average, according to Fidelity’s sector strategist, Denise Chisholm.
  • Dividend-paying stocks’ regular, scheduled payments also may help to reduce the volatility of a stock’s total return.

The economy is gradually recovering from its pandemic-related slowdown and shutdowns, and inflation has hit its highest rate in 39 years. People are emerging from the pandemic and are spending money they saved or money they’re getting from the government. Thus, a combination of soaring pent-up consumer demand and persistent supply chain disruptions has tarnished an otherwise robust economic recovery.

The Bureau of Labor Statistics said the Consumer Price Index of food, energy, goods and services rose by 0.8 percent in November, pushing annual inflation above 6.8 percent. The level is the highest since 1982 and it also marked the sixth consecutive month in which annual inflation rates have exceeded 5 percent.

Currently, approximately 70 percent of Americans rate the economy negatively, with nearly half of Americans blaming Biden for inflation, according to a recent Washington Post-ABC poll.

This combination of economic challenges and consumer worries may make this an especially good time to consider investing in stocks that pay consistent dividends.

A few important things for investors to know about dividend stocks:

  • Dividend payouts typically happen quarterly, although there are a few companies that payout monthly.
  • Many high-quality companies routinely raise their dividend payouts, helping hedge against inflation.
  • A stock’s dividend yield moves in the opposite direction of its stock price, all else being equal, so a high yielding stock may be reason for caution.

Fidelity research finds that dividend payments have accounted for approximately 40% of the overall stock market’s return since 1930. What’s more, dividends have propped up returns when stock prices struggle.

Dividends account for about 40% of total stock market return over time

US stock returns by decade (1930–2020). Over various decades, dividends have remained a fairly steady component of stocks’ total returns amid more highly volatile stock prices. Past performance is no guarantee of future results. Source: Fidelity Investments and Morningstar, as of 12/31/2020.

To invest successfully in dividend stocks, one of the keys is finding companies with strong balance sheets and with secure payouts that can grow consistently over the long haul. Moreover, it’s important to understand the concept of dividend yield, which investors use to gauge how much dividend income their investment will produce.

Investing in dividend stocks

When selecting dividend stocks, it’s important to keep dividend quality in mind. A quality dividend payout can grow over time and potentially be sustained during economic downturns. It’s the primary reason investors must not focus solely on yield.

Steve Goddard, founder and chief investment officer of Barclay, prefers companies with high returns on capital and strong balance sheets. “High return-on-capital companies usually by definition will generate a lot more free cash flow than the average company would,” he says. And cash flow is what pays the dividend.

Although overall dividend health has improved markedly since 2020 and looks good heading into 2022, it’s equally important to check a company’s dividend policy statement so you know how much to expect in payment and when to expect it. Dividend yield is a stock’s annual dividend expressed as a percentage of its price.

It’s crucial to recognize that a stock’s price and its dividend yield move in opposite directions, as long as the dollar amount of the dividend doesn’t change. Investing in the highest-yielding shares can lead to trouble, notably dividend cuts or suspensions and big capital losses

This means a high dividend yield may be a red flag of a problem with the underlying company. For example, a stock’s yield may be high because business problems are weighing down the company’s share price. In that case, the company’s challenges may even cause it to stop or reduce its dividend payments. And before that happens, investors are likely to sell off the stock.

Fidelity Investments’ research has found that stocks that reduce or eliminate their dividends historically have underperformed the market by 20% to 25% during the year leading up to the cut.

Also consider the company’s payout ratio—the percent of its net income or free cash flow it pays in dividends. Low is usually good: A low ratio suggests the company may be able to sustain and possibly boost its payments in the future.

“As a rule of thumb, no matter what the payout ratio is, it is always important to stress test a company’s payout ratio at all points in the business cycle in order to carefully judge whether it will be able to maintain or increase its dividend,” says Adam Kramer, portfolio manager for the Fidelity Multi-Asset Income Fund.

“It all depends on the stability of the cash flows of a company, so it’s more about that than the level of payout. You want to test the company’s ability to pay and increase the dividend under different scenarios. In general, when the payout ratio is more than 50%, it’s a good reminder to always stress test that ratio,” Kramer explains.

Be sure to diversify as you build a portfolio of dividend-paying stocks. To help manage risk, invest across sectors rather than concentrating on those with relatively high dividends, such as consumer staples and energy.

References:

  1. https://www.fidelity.com/learning-center/trading-investing/inflation-and-dividend-stocks
  2. https://www.barrons.com/articles/quality-dividend-stocks-51639134001
  3. https://news.yahoo.com/inflation-pinch-challenges-biden-agenda-200620196.html

Past performance and dividend rates are historical and do not guarantee future results. Diversification and asset allocation do not ensure a profit or guarantee against loss. Investing in stock involves risks, including the loss of principal.

Investors Need to be Patient and Rational

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“It’s a textbook example of why panic is not a[n investment] strategy, unless you’re deliberately trying to lose money.” Jim Cramer, CNBC Mad Money Host

CNBC Mad Money Host Jim Cramer made his comments after the stock market indexes moved higher after a previous major market downturn due to COVID-19 Omicron variant concerns and fear. Wall Street experienced a strong melt-up session led by the technology heavy Nasdaq Index’s 3% jump.

Markets had sold off sharply on November 26, with the Dow, S&P 500 and Nasdaq all losing more than 2% in market cap value as investors knee-jerked reacted to the discovery of the Omicron variant.

“I want you to use it as a reminder that, most of the time, it pays to wait for cooler heads to prevail rather than freaking out in a situation where everyone else is freaking out and lost their heads without complete information,” Cramer said.

“Look, it would’ve been great if you bought stocks something near the lows—that’s what I urged you to do, actually, even if you had to hold your nose because we were simply too oversold. I was relying on technicals,” Cramer said. “But the cardinal sin here was selling stocks out of fear, rather than sitting tight out of rationality.”

The obvious takeaway for investors is that fear and panic are not sound investment strategies, “…unless you’re deliberately trying to lose money.” Never make permanent investment decisions based on temporary market circumstances.

References:

  1. https://www.cnbc.com/2021/12/07/cramer-stocks-recent-rally-shows-need-for-investor-patience-not-fear-.html

Billionaire’s Income Tax

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“Some liberal lawmakers hope the “billionaire tax” will eventually be extended to millionaires.”

A ‘Billionaires Income Tax’ would be a fundamental change in how the tax system operates in the United States, and open up a new revenue stream for the Treasury. The wealth tax plan would “get at the wealth of the richest Americans that currently goes untaxed until assets are sold”, according to Roll Call.

The Senate has proposed a special new tax on the uber wealthy, think billionaires, that Democrats will use to help pay for their next big multi-trillion dollar ‘Build Back Better’ fiscal spending package. The proposed tax on the net worth of billionaires’ stock holdings, real estate and other assets could help Democrats accomplish goals of raising taxes on the wealthy and funding their pet social safety net and climate programs.

The Senate Finance Committee Chair wants to “begin requiring people with more than $1 billion in assets, or who earn more than $100 million in three consecutive years, to begin paying capital gains taxes each year on the appreciation in value of their assets, regardless of whether they are sold”, Politico reported.

The ‘billionaire tax’ plan would reportedly hit around 700 Americans and generate several hundred billion dollars in tax receipts. “We have a historic opportunity with the Billionaires Income Tax to restore fairness in our tax code, and fund critical investments in American families,” said Senate Finance Chair Ron Wyden (D-Ore.). “The Billionaires Income Tax would ensure billionaires pay tax each year, just like working Americans.”

The proposal, should it pass Congress and be signed into law by the President, would almost certainly be challenged in federal court on its constitutionality. The Constitution restricts so-called direct taxes, ‘a term referring to levies imposed directly on someone that can’t be shifted onto someone else’. There’s a big exception for income taxes, as a result of the 16th Amendment, which allows Congress to tax income and earnings. (All current taxes are either forms of income tax or levies on transactions).

The proposed plan would tax people on the appreciation of their publicly traded marketable securities. Effectively, the plan would tax billionaires’ assets on any gains or appreciation in value of those assets. For example, if that asset became worth $110, they’d only owe on the $10 gain. And, the proposal would begin by imposing a one-time tax on all the gains that had accrued before the tax had been created.

Stocks, bonds and other publicly traded assets, marketable securities, would be assessed the levy each year. Harder-to-value assets like real estate or ownership stakes in privately held businesses would not be taxed until they are sold, but would then face an interest charge designed to approximate the tax people would have faced if they had been publicly traded assets.

Capital losses

Under the proposal, a billionaire subject to the tax whose asset values take a dive during the year would have two options. They could choose to:

  • Carry those losses forward to offset potential future mark-to-market gains, or
  • Carry them back to a year within the previous three to generate refunds for taxes paid on unrealized gains.
  • Carrybacks could only offset prior mark-to-market tax, not taxes paid on other income.

    • Nevertheless, the plan would incentivize the wealthy to move into non-publicly traded assets in order to avoid having to pay the IRS. And if the billionaire wealth tax survives the certain court challenges under the current conservative Supreme Court, you can safely bet that many liberal leaning states will follow suit and implement their own version of a billionaire or millionaire wealth tax.

    This new billionaire tax on wealth, instead on income, is a tax that some liberals lawmakers hope will eventually be extended to include every millionaire in assets, regardless of actual net worth. However, Congress always seem able to devise work arounds to exclude their own financial assets and the assets of their big re-election campaign donors from these extremely regressive tax policies.

    Additionally, this proposal, if enacted into law, would dramatically impact compound growth of assets and, would have the unintended consequences of slowing job creation and capital investments in the U.S.

    Senator Mitt Romney (R-Utah) said that the billionaire tax will leave the rich thinking: “I don’t want to invest in the stock market, because as that goes up, I gotta get taxed. So maybe I will instead invest in a ranch or in paintings or things that don’t build jobs and create a stronger economy.”

    References:

    1. https://www.rollcall.com/2021/10/27/wyden-details-proposed-tax-on-billionaires-unrealized-gains/
    2. https://www.politico.com/news/2021/10/27/billionaires-income-tax-details-wyden-517318
    3. https://www.marketwatch.com/story/mitt-romney-says-a-billionaire-tax-will-push-the-rich-to-buy-paintings-or-ranches-instead-of-stocks-11635269305

    Black Wealth Summit

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    Receiving a College Degree Accumulates Wealth for Whites and Not For Blacks

    Wealth managers investing billions of dollars toward racial equity are confronting disparities that are growing worse in some ways even as there are some notable signs of change, according to the Black Wealth Summit. For example, the typical White family has eight times the wealth of the typical Black family, according to the 2019 Survey of Consumer Finances (SCF). The research showed that long-standing and substantial wealth disparities between families in different racial and ethnic groups were little changed since the last survey in 2016.

    Wealth is defined as the difference between families’ gross assets and their liabilities.

    During the Black Wealth Summit, John Rogers of Ariel Investments cited studies by the St. Louis Fed showing that white households with college degrees tend to build wealth while net worth often declines among Black college graduates. The median and mean wealth of Black families is less than 15% of White households’ wealth, according to the Fed’s latest figures from last year.

    John Rogers launched the nation’s first Black-owned money management and mutual fund firm when he was only 24 years old. His firm has reached nearly $17 billion in assets under management.

    Signs of change amid widening disparities

    The data confirms prior research on the role of parental wealth in the transmission of lasting economic advantage: Less-wealthy parents, mostly Blacks, are less able to financially help their adult children, making it more difficult for the next generation to accumulate wealth.

    In addition, Black college-educated households are far more likely than their White counterparts to give financial support to their parents. These parents may have entered the workforce at a time when their only employment provided no pension or retirement savings benefits, or even Social Security.

    In contrast, parents of White college-educated households have mostly benefited from employment-related retirement benefits. Thus, the pattern among White and Black college-educated households is the opposite: Young college-educated White households are more likely to receive financial support from parents and at considerably higher levels

    The findings confirms prior research, which shows that the typical Black college-educated household does not have the same opportunities to add to their family wealth building as their White counterparts, who report large wealth gains at least up to the Great Recession.

    Understanding factors such as inter-generational transfers, homeownership opportunities, access to tax-sheltered savings plans, and individuals’ savings and investment decisions contribute to wealth accumulation and families’ financial security.

    References:

    1. https://files.stlouisfed.org/files/htdocs/publications/review/2017-02-15/family-achievements-how-a-college-degree-accumulates-wealth-for-whites-and-not-for-blacks.pdf
    2. https://www.federalreserve.gov/econres/notes/feds-notes/disparities-in-wealth-by-race-and-ethnicity-in-the-2019-survey-of-consumer-finances-20200928.htm

    Own Your Net Worth and Cash Flow

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    8 out of 10 women will be solely responsible for their financial well-being. Some women will be ready. Many won’t. UBS Wealth Management Report

    As women’s life expectancies increase and the rate of divorce for individuals over age 50 continues to climb, more women will find themselves solely responsible for their own current and long term financial well-being.

    UBS Wealth Management embarked on research–Own Your Worth–to explore women’s thoughts and feelings, the challenges they faced, lessons they learned and advice they would impart to other women.

    With the wisdom of hindsight, nearly 60% of widows and divorcees regrettably wish they had been more involved in long-term financial decisions while they were married, according to UBS’ findings. A full 98% of them urge other women to become more involved early on.

    Unfortunately, too many women ignore the advice of widows and divorcees. In direct contrast to the advice, many married women are taking a lesser role in managing the household finances. In a counterintuitive twist, Millennials are the most willing to leave investing and financial planning decisions to their husbands.

    Fifty-six percent of married women still leave investment decisions to their husbands, according to UBS. Surprisingly, 61% of Millennial women do so, more than any other generation. What’s more, most women are quite content with their backseat role when it comes to investing and financial planning.

    UBS’ research reveals many reasons for women’s abdication, from historical and social precedents to family, gender roles and confidence levels.

    So. why do women minimize their role in major financial decisions? According to USB’ research, the reasons vary:

    • Gender roles run deep – Gender roles are ingrained from early in life and often prove hard to shake. In many cases, married couples are simply imitating the gender roles they witnessed growing up.
    • Men are still the breadwinners – Within families, 70% of men are the main breadwinners, in part because of the gender pay gap and the career breaks women take to raise children.
    • Time constraints are challenging – Whether married or not, women have many demands on their time. They take on the majority of household duties, including childcare and chores, as well as paying bills and tracking spending.
    • Competence vs. confidence – Together, history and society have conspired to affect women’s financial confidence. Both women and men think men know more about investing, and women are less confident than men in making major financial decisions. Women consistently underestimate their own abilities while overestimating what is required to be financially involved.

    Yet, most study respondents participated in some financial decisions while married, from handling cash flow and bills to saving and investing. Regardless of their level of engagement, however, most agree it wasn’t enough. The research shows:

    • 59% of widows and divorcees wish they had been more involved in long-term financial decisions
    • 74% don’t consider themselves very knowledgeable about investing
    • 64% of widows blame themselves for not being more financially involved (53% of divorcees)
    • 56% of widows and divorcees discover financial surprises
    • 53% would have done fewer household chores to find more time for finances
    • 79% of women who remarry take a more active role

    USB recommends three actions to take today

    The advice from women who have been there is clear: The time to become involved in your family’s present and future financial well-being is today, not when some unforeseen events happen in the future.

    Women are encouraged to get involved in their financial well-being as a form of self care, much in the same way you would take care of your health by:

    1. Owning your worth – Know where you stand and what you want for the future. Take the time to add up your assets and liabilities, like loans, credit and other debts, and ask for full transparency from your partner.
    2. Finding your voice – Start the conversation with your partner. Talking about money is considered taboo to some couples, particularly before they are married. But if you found yourself alone tomorrow, do you know what you’d do to make sure you’re financially secure? There is a tremendous benefit to having open communication about money with a trusted confidante.
    3. Setting an example – Model financial partnership for your family and loved ones. According to our survey, women are repeating the gender roles they saw growing up. As you begin taking a more active role in your finances, you can set an example of financial partnership for the younger generation.

    Though women are aware of their increasing longevity and the financial needs associated with it, most tend to focus their efforts on short-term financial responsibilities such as managing the household’s day-to-day expenses and paying the bills.

    In contrast, taking charge of long-term financial decisions, such as investing, financial planning and insurance, can have far more impact on their future than balancing a checkbook.

    By sharing decisions jointly, both women and men can face the future with optimism—and set an example of financial partnership for generations to come.

    Almost 60% of women do not engage in the most important aspects of their financial well-being: investing, insurance, retirement and other long-term planning. USB Wealth Management Report

    References:

    1. https://www.ubs.com/content/dam/WealthManagementAmericas/documents/2018-37666-UBS-Own-Your-Worth-report-R32.pdf
    2. https://www.ubs.com/us/en/investor-watch/own-your-worth/_jcr_content/mainpar/toplevelgrid_1797264592/col2/teaser/linklist/link_2127544961.2019551086.file/PS9jb250ZW50L2RhbS9XZWFsdGhNYW5hZ2VtZW50QW1lcmljYXMvZG9jdW1lbnRzL293bi15b3VyLXdvcnRoLXJlcG9ydC5wZGY=/own-your-worth-report.pdf

    Growing Your Money

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    When investing your money in the stock market, doing your research and investing in what you know are crucial elements of successful investing. You don’t have to be a financial expert to start buying stocks, but the more you know going in, the more likely your investing journey will be successful.

    It’s critical to understand that stocks represent legal ownership in a company; you become a part-owner of the company when you purchase shares.

    People ultimately invest in stocks with one end-goal in mind: to grow their money and build wealth.

    But it’s important to note that growing your money and building wealth are not guaranteed. Investing in individual stocks carries much more risk than buying bonds or putting your money in index funds.

    As you begin to research stocks, first know how much risk you can take, or your risk tolerance, and your time horizon.

    Financial experts typically recommend that you only invest money that you can afford to lose and, since investment returns are typically maximized over the long term, only invest money that you won’t need in the short term (less than three to five years).

    Stock’s Value vs. Price

    Buying stocks equates to owning companies which lets you be a part of something that’s normally very exclusive. It allows you to invest in pieces of well-known companies, such as Amazon, Google or Apple.

    A company’s stock price has nothing to do with its value, because the share price means nothing on its own.

    The price of a stock will go down when there are more sellers than buyers. The price will go up when there are more buyers than sellers.

    A company’s performance doesn’t directly influence its stock price. Investors’ reactions to the performance decide how a stock price fluctuates.

    The relationship of price-to-earnings and return on equity is what determines if a stock is overvalued or undervalued. Essentially, You should make no assumptions based on price alone.

    Knowing when to sell is just as important as buying stocks. Most retail investors buy when the stock market is rising and sell when it’s falling, but smart investors follow a strategy based on their financial plan and requirements.

    Benjamin Graham is known as the father of value investing, and he’s preached that the real money in investing will have to be made not by buying and selling, but from owning and holding securities, receiving interest and dividends, and benefiting from the stock’s long-term increase in intrinsic value through compounding.

    Learning how to invest in stocks might take time, but you’ll be on your way to growing your money and building your wealth when you do so. But, keep your risk tolerance, time horizon and financial goals in mind,

    References:

    1. https://www.thebalance.com/the-complete-beginner-s-guide-to-investing-in-stock-358114

    Sequence of Returns Risk in Retirement

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    A stock market pullback can pose a risk early in retirement.

    Retirees face many risks when investing for retirement. Markets crash, inflation can eat into your returns, you might even worry about outliving your savings. And, there’s another big retirement risk: Sequence of returns risk.

    Down markets can pose significant “sequence of returns” risk in the early years of retirement. Sequence risk is the danger that the timing of withdrawals from a retirement account will have a negative impact on the overall rate of return available to the investor, according to Investopedia.

    A “sequence of returns” risk is basically about how the order, or sequence, of stock returns over time — combined with your portfolio withdrawals — can impact your balance down the road.

    Once you start withdrawing income, you’re affected by the change in the sequence in which the returns occurred. During your retirement years, if a high proportion of negative returns occur in the beginning years of your retirement, it will have a lasting negative effect and reduce the amount of income you can withdraw over your lifetime.

    Timing is everything. Sequence risk is the danger that the timing of withdrawals from a retirement account will damage the investor’s overall return. Account withdrawals during a bear market are more costly than the same withdrawals in a bull market.

    “If there’s a big loss in the market and you’re taking withdrawals, you could be taking more from your portfolio than what it can make up for,” said certified financial planner Avani Ramnani, managing director at Francis Financial in New York. “If that happens early in retirement … the recovery may be very weak and put you in danger of not recovering at all or being lower than where you would have been and therefore jeopardizing your retirement lifestyle.”

    One of the basic rules of investing is that a long-term strategy is self-correcting. And, for long-term investors — those whose retirement is many years or decades away — such market drops matter less because there’s time for their portfolios to recover from this risk before they need to start relying on that money for cash flow in retirement.

    Retirement is a long game.

    Since running out of money in retirement is the primary concern for most retirees, fortunately, there are options for mitigating the risk:

    • Plan to spend more conservatively since the less you spend consistently, the less you have to withdraw overall.
    • Withdraw and spend less when your portfolio performance is suffering. 
    • Reduce the risk in your portfolio by creating a low stock allocation early in retirement but increase it over time, or use bonds for short-term expenses and stocks for long-term ones.
    • Set aside assets outside your investment portfolio that can support your spending needs when stocks are underperforming.

    You may simply be able to meet your goals without taking on the risk that comes with stocks.

    Key Takeaways

    Sequence of return risk is basically the risk that market declines in the early years of retirement, paired with ongoing withdrawals, could significantly reduce the longevity of your portfolio. Thus, timing is everything, and in retirement early market declines, particularly if they are paired with rising inflation, can have a huge effect on how long a nest egg can sustain you in retirement.

    The recommended way to mitigate sequence of returns risk when you can’t predict future market performance or future rates of inflation is by managing spending and/or keeping a portion of your portfolio in liquid assets, such as cash or bonds, to ride out the market downturn.

    When market returns are high and inflation is low, retirees can distribute more from their portfolios, according to Forbes Advisor Staff Editors Rob Berger and Benjamin Curry. When market returns are negative and inflation is higher than expected, retirees reduce the amount of their annual distributions.

    Remember, no one can forecast market performance or economic inflation. Yet, by managing your spending, you can adjust annual withdrawal amounts to reflect inflation and market returns.

    References:

    1. https://www.investopedia.com/terms/s/sequence-risk.asp
    2. https://www.thebalance.com/how-sequence-risk-affects-your-retirement-money-2388672
    3. https://www.cnbc.com/2021/09/21/stock-market-pullback-is-a-big-risk-early-in-retirement-what-to-know.html
    4. https://www.forbes.com/advisor/retirement/sequence-of-returns-risk/