Winning Investment Strategies

A practical approach to creating wealth by Kenneth Bechtel

It Pays to Know Yourself

I read an interesting article in the Wall Street Journal last week titled “Investor, Know Yourself” by Meir Statman. The article is about getting in touch with your feelings if you want to be a smarter investor. Mr. Statman writes that even though choosing investments should be made on reason, there are emotions at play when we choose investments. For instance there is the fear of taking a risk or making a mistake. This emotion can keep us from making a good investment decision and making a good return.

know yourself
photo credit

“If we understand how we feel, how we think and what kind of personality we have, we get more insight into the forces that affect our investing behavior. And that might make us smarter investors”, states Mr. Statman.

The article continues with a quiz of eight questions that help you determine how you think. The first question is What are you prepared to lose? This question determines how you balance risk and reward. The second question, Do bad choices bug you? measures your regret which could hinder your actions. The third question is Think you can beat the market? shows the amount of overconfidence you may have. The next question has to do with Attention to Details and measures your conscientiousness, how much thought you put toward your investment. Question number five is titled Life of the Party and determines how much of an extrovert you are. As an extrovert you have to make sure that your assessment of risks and returns are thoughtful. The subject of question six is A Generation of Spirit which determines how agreeable you are. Question seven is titled A Vivid Imagination and measures how open a person is. Finally question eight is A Worrywart? Rating yourself high on this question means you may have a tendency toward neuroticism according to the author.

I took the quiz and came up with the following. As an investor I am cautious and somewhat regretful when I make the wrong choice. I am not overconfident. I am conscientious and not the life of the party. I am middle of the road when it comes to openness and not a worrywart. I will keep these things in mind when investing. Perhaps I could take a little more risk when making investment decisions and not play it so safe. I could be missing out on some lucrative opportunities.

If you are interested, I encourage you to take the quiz yourself. Having more insight into your feelings, how you think and your personality may make you a better investor.
Please let me know what you think with your comments.

Gold Lover or Gold Hater

Gold has been on a wild ride lately. Last week gold sank down to its lowest level in two years. This week the price is climbing back up. If you adjusted the price of gold to reflect inflation, the price is still way above its levels in the 1970s. In a previous blog, I talked about if now is a good time to add commodities to your portfolio since prices are down. Right now I would like to focus just on gold.

gold
photo credit

Investors seem to either love or hate gold. Some investors use it as a hedge against inflation and claim that gold is the only real money out there. Other investors hate gold and claim that it is just an object that has delusions of wealth. Gold doesn’t produce anything or generate any income.

As gold prices sank, the explanation of why depends on your view of gold. Gold lovers say that falling prices are proof that things are getting worse. Economies are slowing down and European governments rocked by bad times are selling their reserves of gold. Gold haters on the other hand claim that lower gold prices signal an improvement in the economy. Investors are putting their money in stocks where companies are producing and generating an income.
Finding actual data on gold is difficult because gold has been heavily regulated or prices have been fixed by governments in the past. Some studies have shown however that gold has done well when stocks have done badly. In my opinion, this is what makes gold as a small part of your diversified portfolio attractive. One it is good to have a diversified portfolio and two, gold provides a little insurance if your stock portfolio turns south.

It is easy to invest in gold. Probably the easiest way is to invest in a gold ETF. One such fund it the SPDR Gold Trust. It doesn’t matter if you are a lover or hater of gold. Use whatever philosophy that you have and buy gold when you think that it is low and sell when you think it is too high. Prove your philosophy right.

Please let me know what you think by commenting below.

Does Austerity Work?

In the financial news, austerity has had a lot of buzz lately. Austerity is a policy that governments adopt to lower their budget deficits. This can include government spending cuts and tax increases. Many of the European countries that are in a financial crisis such as Greece, Portugal and Spain are experiencing this austerity policy by their governments. These countries have been forced to adopt this policy as a means to right their budget issues and to stay in the European Union. Some have argued that the United States should adopt this same policy in order to reign in its trillion-dollar budget deficit. The question is does austerity work, and what can an investor expect if an austerity program is adopted.

austerity_measures
photo credit

Looking at the current situation in Europe, austerity in Greece, Portugal and Spain hasn’t worked. After having adopted the austerity policies, these countries are still mired in high unemployment and decreasing GDP. Some argue that not enough time has passed for the austerity measures to work in these countries. What has caused a lot of buzz recently is that a report by two Harvard economists, Reinhart and Rogoff, arguing the benefits of austerity has been shown to contain errors in its research. The report determining that austerity will work for governments, now shows that it doesn’t. Governments have been using this report as an argument for austerity, now they can’t and the whole austerity question is being revisited.

In my opinion, it makes sense that austerity does not work during a time of financial crisis. The government is typically the biggest employer in a country. The government employs people through its military and domestic spending programs. A reduction in government spending means that a lot of people are going to lose their jobs. During bad economic times, a reduction in government spending is going to compound the problem of high unemployment. A similar argument can be made with government tax policy. During rough economic times, if the government increases taxes, people are not going to have as much disposable income to spend resulting in lower demand for goods and higher unemployment.

The problem, I believe, is that government cannot stop its spending when the economy rights itself. Once the economy comes out of a recession, the government continues with its same spending programs. They even increase spending. In regards to taxes, as the economy improves, more tax revenue comes in. The government feels that they have to spend this revenue. I would like to see during good economic times, the government reduce spending and pay off some of the national debt. Once that is accomplished, look at reducing taxes. For the investor, when a government adopts an austerity program, look for a pullback in growth.

Please let me know what you think by commenting below.

Employee Stock Ownership Plans

My current employer offers an employee stock ownership plan or ESOP. The ESOP allows me to purchase company shares of stock through payroll deductions. The program is popular with my coworkers. Practically, everyone I know participates. You can contribute anywhere from $2.00 to $1,000 a paycheck. My company then matches $0.15 for every dollar that I contribute up to the first $1,800 per year. Most people who I have talked to use the plan for a rainy day fund or to save money for Christmas presents.

ESOP
photo credit

From what I have read, many companies offer these plans to their employees. This program is a good way to own a piece of your company and enjoy an increase in wealth as the company’s stock appreciates in value. Companies typically offer a match to your contribution anywhere from 5% to 15%. Fortunately, my company offers a 15% match. You can sell the shares anytime that you want. Some people sell their shares right away for a quick profit, others use the program to save for something special. Some people even use it to save for a house, college tuition or retirement.

A benefit of offering a stock ownership plan for the company is retaining their employees. The stock ownership plan can help recruit employees too. According to an article in the Wall Street Journal, companies that have higher paid workers such as technology companies have about an 80% participation rate. In other companies, participants tend to be high performers who highly value these plans.

There are some issues to consider when participating in these plans. I often talk about not putting all of your eggs in one basket. A stock ownership plan can lead to this if you are not careful. No matter how great you think your company is, the stock can go down and you want to protect yourself with diversification. Make sure that you are taking advantage of other investment opportunities that your company may offer such as a 401(k). Then there are taxes to consider. You are taxed at the ordinary income tax rate on the amount your company matches. When you cash out, there are capital gains taxes to consider.

All in all, my experience has been that the company stock ownership plan is a great part of my overall savings plan. Where else are you going to make 15% on your money every paycheck? The money that is taken out of my paycheck, I really don’t miss. After a while I have a good chunk of change built up. Typically, I cash out once a year and try to do something fun with the money.

Please let me know what you think by commenting below.

Is it Time to Add Commodities to Your Portfolio?

A good investment portfolio has a mixture of stocks and bonds. How about adding commodities to your portfolio? Commodity prices currently are down. Is now a good time to buy commodities?

commodities1
photo credit

According to an article in the Wall Street Journal by Brett Arends,

Studies have found that over a period of a decade or more, adding a basket of commodities to an investment portfolio can reduce volatility and provide strong protection against inflation.

Mr. Arends further writes that the Dow Jones-UBS Commodity index is down 10% in the past seven months and down 22% over the past two years. This can be can be contributed to less demand and growth especially from China.

Commodities do best under inflation. In my last blog, The Quantitative Theory of Money, I wrote that inflation is part of the money equation. The easy money policy of the Fed eventually will lead to inflation according to the equation. With this in mind, buying commodities might be a good hedge against anticipated inflation. Especially now with commodities experiencing price weakness.

I recommend that one only invests up to 15% of their total portfolio in commodities. If your current portfolio mix is 80% stocks and 20% bonds, then it may be alright now to add say 5% commodities, leaving 75% in stocks and 20% in bonds. As I have mentioned in my blogs before, ETFs are a good way to invest. They offer diversification. Mr. Arends lists a couple of ETFs to look at. The are the Powershares DB Commodity Index Tracking Fund which charges annual expenses of 0.93% and the GreenHaven Continuous Commodity Fund with 1.05% in annual fees.

So take a look at commodities. Prices are down right now, and if you think like I do that inflation is going to increase, it might be wise to invest a small percentage of your portfolio in a commodity ETF.

Please let me know what you think about commodities by commenting below.

The Quantitative Theory of Money

Yesterday, the Wall Street Journal ran an article titled “Low Inflation Gives Fed Room” by Jon Hilsenrath. The article states that consumer prices were up 1.5% in March from a year earlier. This is below the Fed’s 2% inflation goal. Why is this interesting and what does it mean for the average investor? Well one needs to be familiar with the quantity theory of money(QTM) equation to explain this.

fisher
photo credit

The quantity theory of money is explained by the equation MV = PT, where M is the money supply, V is the velocity of money or the amount of times money changes hands, P is the price level and T is the volume of transactions of goods and services. Looking at the equation, one side is equal to the other. If MV increases, then PT must increase in order for the equation to stay equal. And vice versa, when MV decreases, PT must decrease. Since the Great Recession, 2008, the Fed has greatly increased the money supply, M. There has been Quantitative Easing 1,2 and 3 as well as Operation Twist. Currently the Fed is purchasing $85 billion worth of mortgage backed securities per month. Given that V hasn’t really changed much since 2008 because the economy hasn’t really taken off, this means that the other side of the equation has to increase. But it hasn’t. P, the price level(inflation) hasn’t increased. Neither has T. GDP in the United States has been creeping along.

With the Fed printing all this money, the expectation for inflation or the price level to increase hasn’t surfaced. Does this mean that the quantitative theory of money is wrong? The one thing to keep in mind is that changes in the QTM are not instantaneous. There can be a lag between one side of the equation affecting the other side. This is why the article is interesting. With the Fed printing all this money, everyone has been on the lookout for inflation, but with the consumer price index only increasing by 1.5% in March, inflation hasn’t shown up yet. It is just a matter of time though for inflation to show itself, and the article mentioned that it will be tricky for the Fed to time when it will be alright to stop buying bonds let alone sell them.

For the average investor a low consumer price level increase of 1.5% means that the Fed is going to keep printing money for now and buying mortgage-backed securities. This easy money will continue to help prop up the stock market and keep long-term interest rates low. Keep an eye out for inflation though in the future. This may trigger the Fed to slow down its easy money policy, and may be a time to think about your position in the market.

Please let me know what you think by commenting below.

Has Refinancing Run Its Course?

In previous blogs I have mentioned how important housing is to the economy. People purchase houses when they feel good about the future of the economy. Buying a house is a big investment that is not taken lightly. Purchasers of homes have to have confidence in the economy and confidence that their house will have a chance to appreciate in the future. Then there is everything that goes along with the purchase of a home such as buying furniture, appliances and other items to make your house feel like a home. Buying a home has kind of a multiplier effect that reverberates through the whole economy when people buy the other necessities that go with a home. The housing index that is calculated by the National Association of Realtors is a good leading indicator of how the economy is doing. It measures sales of new homes, sales of existing homes, housing inventories as well as several other housing related items. An increasing indicator means that people are buying houses and that houses are being built. This is a good indicator that the economy is growing.

mortgagerefinance1
photo credit

Another indicator of the housing market is mortgages originated by banks. Last week Wells Fargo, the biggest home lender reported that they originated fewer home loans in the first quarter of 2013. In addition, JPMorgan Chase the nation’s biggest bank reported the same thing. This does not bode well for an improving economy. Also housing inventories are increasing according to the National Association of Realtors, and homes are sitting on the market for a longer period of time.

Since the financial crisis, the Fed has lowered rates to zero. This has caused mortgage rates to fall to their lowest levels on record, therefore, people have been refinancing their mortgages to lock in these low rates. Wells Fargo and JPMorgan Chase have benefited from all of this refinancing. The lackluster revenue results from these banks signal that all of this refinancing is slowing. The refinancing party may be about over with mortgage rates beginning to increase again since last year.

The banks are doing fine at present. Their profits are up and their earnings have exceeded expectations. The worrisome piece is that their revenues are down. Higher profits and record earnings cannot continue if revenues continue to decrease. What we need to see are increasing revenues from new home mortgages, not refinancing. Increased refinancing helps in the short-run, but not in the long-run. In order for the economy to improve, housing needs to improve. The revenue results from the banks last week add another mixed signal to where the economy is going.

Please let me know what you think by commenting below.

The May Swoon

A well-known saying in Wall Street circles is sell in May and stay away. The saying comes from the notion that stocks slump during the summer. This summer slump is also known as ‘sell in May’ and the ‘Halloween indicator’. Halloween is significant because this is the time of year when stocks begin to pick back up according to some. Mark Hulbert recently wrote an article in the Wall Street Journal explaining that there may be some truth in the numbers that back up the May Swoon.

May
photo credit

In his article Mr. Hulbert suggests there may be a pattern to stocks performing not as well during the summer months then the winter months. According to the article, the Dow Jones Industrials has gained 11.5% since Halloween 2012. Whereas during the summer months, the Dow fell 0.9% last year. In the prior year there was a 10.5% gain during the winter months and a 6.7% drop during the summer months states Mr. Hulbert. But two years does not make a pattern. So how has the May swoon theory hoeld up over the past several years?

Over the last 50 years, the Dow Jones on average has produced a gain of 7.5% during the winter months and has lost 0.1% during the summer months writes Mr. Hulbert. Other countries and stock markets have experienced the May swoon as well. According to the article, the United Kingdom demonstrates a similar pattern. This is pretty good evidence that the May Swoon may be of some significance.

So should you go out and sell all of your stocks on May 1st? No, I would not recommend this. The article in fact states that there may be a way to take advantage of the May Swoon. Stocks that are most affected by this pattern are stocks that are in the manufacturing sector and production sector. The May Swoon does not seem to have an effect on consumer goods, financial services, technology and communication stocks.

Keep the idea of the May Swoon in mind and look for trends this time of year that it may be taking effect. If the stock market starts to trend down then you may want to keep the May Swoon in mind. Your investing decisions shouldn’t be based on just one indicator or piece of news. Reacting to every little piece of information out there would drive a person crazy. Always keep the big picture in mind and diversify.

Please let me know what you think about the May Swoon with your comments.

Don’t Overlook the 401(k)

One of the most popular ways to save for retirement is the 401(k) retirement plan. Most employers offer them in various ways. The days where a person would work for a company for forty years and retire with a pension are no longer a common option. Typically, a person changes careers several times before they retire. Some people don’t retire at all. Then there is the ever-present question at the back of your mind wondering if social security will be solvent when you retire. So saving for your retirement on your own has become more of a reality these days. And the 401(k) is a great avenue for this.

401k-piggy-bank-front-offlead
photo credit

When interviewing for a job or changing jobs, make sure and inquire about the company’s retirement plan. As part of the benefit package, a company’s retirement plan is up there in importance with salary, bonuses and medical benefits. Most companies offer a 401(k), but the terms can differ greatly from company to company. Some offer automatic enrollment where you are contributing to your retirement a certain percentage of your income automatically unless you opt out. And you don’t want to opt out! Contributing to your 401(k) offers the great benefit of pretax contributions as well as a tax delay on your gains until you begin withdrawing from your 401(k) account. Other companies offer a contribution match. For example, a company will match the first 6% of the contributions that you make to your 401(k). That’s free money! You can’t pass up this benefit.

If you change jobs during your career, don’t cash out. I can’t stress this enough. If you cash out, there is a 10% penalty that you will have to pay, plus all of the taxes. This would result in a tremendous loss to your retirement nest egg. You want to leave the money in a retirement plan. There are a few ways to do this. One way is to roll over your 401(k) account. This is where your retirement money is put into another account without penalties. Many mutual fund companies can help you with this such as Vanguard or T. Rowe Price. Another option is to leave the money in your company’s 401(k) account. One thing to look out for though is if you change jobs often and leave a little retirement money in all these different accounts, it would be difficult to make sure that your retirement portfolio is balanced the way that you want it.

The important thing to remember in saving for retirement is that you want to begin saving early and save as much as you can. This gives the principle of compounding a chance to take effect. The more time that your money has to grow, the bigger your retirement nest egg will be. Saving $500 a month at 25 years old would require $1500 a month if you waited until 40 years old to reach the same retirement amount at age 65. So save early and save often.

Please let me know your thoughts by commenting below.

Social Media Approved

In efficient markets it is important that everyone has access to the same information. Companies that are traded publicly are required by the Securities and Exchange Commission (SEC) to disclose information to the general public before company executives or insiders can trade on this information. Everyone must have equal access to this information. One group of investors cannot have an advantage over another group. This levels the playing field for all. Insiders such as company executives who have access to privileged information about a company cannot buy or sell shares in the company until this information is disseminated to the public. These rules make the market system work fairly and efficiently for all.

Social-media-for-public-relations1
photo credit

The way that information has been disseminated over the years has changed. In the past investors would get information about companies through newspapers and news services. Another means of communication approved by the SEC was through filing a form called the 8-K. This is a form specifically for notifying investors of important events or changes in the company. Also popular among companies is the use of the conference call to disseminate information. It wasn’t until 2008 that the SEC approved the internet as a means of disseminating company information to the public. Since then companies have been permitted to disseminate information on their corporate websites.

On Tuesday April 2nd, the SEC took the next step allowing social media as a portal to disseminate information to the investing public. This is allowed as long as investors are told that the company is going to use social media as a means of disseminating information. Needless to say, this is a boon for social media, and legitimizes social media as a standard for communication. Posting on company Facebook and Twitter accounts are now just as good as releasing news on company websites or filing with the SEC. Social media has truly become main stream in the investing world and has cemented itself as a platform that is here to stay. As if there was ever any doubt.

Please let me know what you think by commenting below.

Post Navigation