Three in five Americans pay more attention to how their friends spend compared to how they save.
Americans remain optimistic that they will be wealthy at some point in their lives, and two in five believe they will achieve that goal within a decade. Yet, many obstacles and bad financial habits stands as road blocks to successfully accumulating wealth.
More than a third of Americans admit “their spending habits have been influenced by images and experiences shared by their friends on social media and confess they spend more than they can afford to avoid missing out on the fun”, according to Schwab’s 2019 Modern Wealth Index Survey.
Americans struggle to save, invest and accumulate wealth…they:
Live Paycheck-to-paycheck – A majority (59 percent) live paycheck to paycheck
Carry Credit card debt – Nearly half (44 percent) typically carry a credit card balance
Lack an Emergency fund – Only 38 percent have built up an emergency fund
Spend on Non-essentials – On average, they spend almost $500 a month on “non-essential items”
“The burden to ‘keep up with the Joneses’ has been part of American for decades, but it appears that social media and the fear of missing out (FOMO) have increased the pressure to spend,” said Terri Kallsen, executive vice president and head of Schwab Investor Services. “Spending is not the enemy, but when we allow social pressure or other forces to lure us into spending beyond our means, it can impact long-term financial stability and become a larger problem.”
People need to gain more insights about their own habits of saving, spending, investing and accumulating wealth. Schwab’s survey shows that more than 60 percent of Americans who have a written financial plan feel financially stable, while only a third of those without a plan feel that same level of comfort.
Top 10% of Americans by wealth own 87% of all U.S. equity stocks
The top 10% of Americans by wealth owned 87% of all stock outstanding in the first quarter, according to research from the Federal Reserve. That share has grown over the past decade, from 82.4% in 2009. Fed researchers say the increase in wealth among the top 10% is largely a result of that cohort obtaining a larger concentration of assets. These increases were mirrored by decreases for households in the 50-90th percentiles of the wealth distribution,” Fed researchers said.
The percentage of Americans who own stock, either directly or through retirement or mutual funds, is falling. It most recently stood at about 55%, according to an April Gallup poll, down from a high of 67% in 2002.
“The middle class has essentially been left out of the stock market surge,” said Edward Wolff, an economics professor at New York University. “The rich have taken off from the rest of society.”
S&P 500 and NASDAQ indexes have closed at all time highs
The S&P 500 and NASDAQ have soared to a new high, wiping out its losses since the worst of the coronavirus-induced downturn in March. Stocks continue to shrug off historic unemployment rates and other economic warning signs.
The S&P 500, the benchmark U.S. stock index, has surged more than 50% since bottoming in March and is back at record levels, largely thanks to the unprecedented stimulus programs enacted by the Federal Reserve and Congress.
Although the stock market has erased its losses suffered during the pandemic, the economy appears to be telling a different story. It contracted at the sharpest rate on record in the second quarter, and the unemployment rate remained above 10% in July, after reaching nearly 15% in April.
The current disconnect between the stock market and the economy is extremely unusual. The economy is not confirming the stock market’s strength. The stock market has surged since March 2020 lows, with the S&P 500 and NASDAQ indexes eclipsing all time highs in August 2020.
FOMC acknowledged that after the initial surge in job losses and plunge in economic activity, things have started to improve. According to the statement, “Following sharp declines, economic activity and employment have picked up somewhat in recent months but remain well below their levels at the beginning of the year.”
“The stock market isn’t the economy. The economy is production and jobs, and there are shortfalls in virtually every sector of the economy.” -Janet Yellen, former Chair of the Federal Reserve
We remain in the midst of a global crisis as the impact of COVID-19 infections continues to spread. As a result, we are experiencing an income crisis for a wide swath of the working population. The labor market decline was most catastrophic on low-end age earners. Those jobs have been the slowest to recover and many of those jobs have been loss permanently.
financial markets reflect assessments of the value of assets today based on investors’ expectations for the cash those assets will generate.
The U.S. economy is highly consumer-driven according to economists; our Gross Domestic Product (GDP) levels are guided primarily by consumer spending. The “V-shaped” recovery in retail sales data has been a boon to the bull market narrative. There is, however, legitimate concern over the potential impact if the Congress and Executive branch are unable to hammer out a compromise on extended unemployment benefits.
Causes of the disconnect
“Financial markets reflect assessments of the value of assets today based on investors’ expectations for the cash those assets will generate.” Vanguard Investments
Hope-ism and federal intervention are buoying up the stock market. “Hope-ism” is the wishful thinking that makes investors believe that the economy will not only recover quickly, it will snap back with vigor as the virus is quickly vanquished.
Federal intervention has been stratospheric over the past decade plus. Coming into the pandemic, the Fed had injected $5 trillion in Quantitative Easing (QE) from the 2008 recession. Now it has added another $3 trillion in the first round of COVID-19 relief and will likely add at least another $2 trillion, bringing the total to a whopping $10 trillion.
The two, the U.S. economy and equity stock markets, will reconnect again. Either the economy will recover, as the stock market predicts, or the stock market will reprice and crash. In the following we discuss the causes of the disconnect and what investors should be concerned about as the disconnect corrects.
Investors should expect a stock market correction. Greed will give way to fear. FOMO (fear of missing out) will become FOLO (fear of losing out). Also, there are plenty of other threats to the economy and stock market including a global debt crisis, cyber crime and terrorism, trade wars and socioeconomic unrest.
Small company, higher quality “value” stocks are better long-term investments than large company growth stocks.
Small cap value stocks are assets that may be temporarily undervalued by investors. These companies typically grow at a slower pace than the typical company.
Over the past decade, growth stocks have largely outperformed small cap value stocks.
Small cap value stocks are currently undervalued by the market. If investor sentiment is correct and other investors ultimately recognize the value of the company, the price of these stocks may rise over the long term.
Historically, the stocks of smaller companies have outperformed those of larger companies. And relatively inexpensive stocks have outperformed more expensive stocks.
Over a long term, small cap stocks deliver superb investment returns, better than any other asset class and many percentage points better than the equity market as a whole. And, there exist a body of research that shows that over a long investment horizon, small cap stocks have outperformed their large cap brethren. From 1928 through 2014, U.S. small-cap value stocks turned in a compound annual return of 13.6% compared with 9.8% for the Standard & Poor’s 500 Index.
Finance professor Kenneth French and Nobel laureate Eugene Fama, say that “…small company value stocks are better long-term investments than large company growth stocks, though they add (naturally) that they are also riskier.”
Currently, small company, higher quality “value” stocks are trading at their biggest discount since the dot-com bubble in 1999-2000. But it is important for investors to invest in small cap stocks that have the “quality” factor and their corresponding discount are the reason that quality has become the significant factor in explaining the sectors out-performance.
For quality, it is important to look for companies with above-average sustainable growth and profitability—and strong free-cash flow generation. It is also important to focus on return on assets, rather than return on equity, since the latter can be boosted by debt. Additionally, it is important to prefer companies with conservative balance sheets.
The simplest solution for investors wanting to embrace higher quality, smaller cap value stocks, is to buy a low-cost exchange-traded fund which invest small company, higher quality “value” stocks. BlackRock offers the iShares Core S&P Small-Cap ETF (IJR), with a low expense ratio of 0.07% and Vanguard offers Small-Cap Value ETF (VBR), with a low expense ratio of 0.07%.
One of Wall Street secret: Investors can make good money with the stocks of smaller companies whose names aren’t necessarily household words.
In the long run, small-cap value is the undisputed champion of the major asset classes such as large cap growth. But the operative phrase there is “in the long run.” Over shorter time periods, small-cap value stocks can be disappointing and significantly trail asset classes such as large cap growth.
“Your savings rate is…the biggest determinant of how you do financially over time.” Christine Benz, the director of personal finance for investment research firm Morningstar
As the stock markets plunged across the globe in March, a wave of Americans saw an opportunity to start investing. But chasing hot stocks like Apple, Tesla or Amazon, according to financial experts, is akin to making the same old ‘tried and true’ investment mistakes as our forefathers and foremothers.
“Individual stocks are terrible investments for people just starting out,” according to Christine Benz, the director of personal finance for investment research firm Morningstar.
Active investing strategies, such as buying and selling individual stocks on trading platforms like Robinhood, often underperforms over the long-term versus more passive investment strategies, such as investing in low cost index funds that simply follow a stock market index like the S&P 500.
While chasing hot stocks may seem thrilling in the short-term while you’re winning, the keys to financial success and security are incredibly mundane. They include:
Creating and following a financial plan;
Disciplined and deliberate savings;
Investing for the long-term;
Time in the market beats timing the market;
Investing in market index mutual funds and ETFs; and
Amazon’s stock price continues to soar since the company first sold shares to the public on May 15, 1997.
The initial public offering (IPO) was priced at $18 per share. There have been three stock splits*, all between 1998 and 1999. Two of the splits were 2-for-1, while the other was a 3-for-1 split, according to Motley Fool (Fool).
If you invested $1,000 at the IPO price of $18, you would have purchased 55 shares. You would now have 660 shares after the three stock splits. Those shares would be worth $1,985,280 at today’s high price of $3,008 per share making you an Amazon millionaire. The total return from that initial $1,000 investment would be about 36% compounded annually, or a total return of about 198,000%.
Investors who stuck with Amazon’s stock through the harrowing market volatility and the bursting of the dot-com bubble around the end of 1999 and 2000 would have been handsomely rewarded for their patience and long term perspective.
The stock soared from a split-adjusted IPO price of $1.50 per share to $106.69 per share on Dec. 10, 1999. From there, it proceeded to fall 96% until it bottomed on Sept. 28, 2001, at $5.97 per share, according to Fool.
If you invested $10,000 in Amazon 11 years ago on March 9, 2009, when the S&P 500 hit its closing low during the financial crisis and the Amazon’s stock closed at $60.49 per share, the value of that investment would be approximately $467,000, today, for a total return of 4,570%. In the same time frame, by comparison, the S&P 500 earned a total return of around 255% according to CNBC.
Microsoft reports fiscal fourth-quarter earnings after the close on July 22.
Investors anticipate strong results from the company’s growing portfolio of cloud businesses, including Azure, Office 365 and Teams.
Microsoft Corp. (MSFT) is expected to report adjusted net income of $10.6 billion, or $1.38 a share, on sales of $36.4 billion.
Shares of Microsoft have hit all-time highs. The software giant recently shut down Mixer, a videogame streaming service, because it wasn’t able to grow Mixer to serve the streamers it had hired to generate content and to bring followers.
Most individual investors and traders know that they need to have a plan, manage risk, and put in the work learning and practicing. If they do that, they are well on their way to success.
Don’t place market orders – Use limit orders, which set the maximum price you are willing to pay to buy, or the minimum price you are willing to accept to sell. A market order tells your broker to execute your buy or sell order as soon as possible and at the current bid or ask price. That strategy works for liquid stocks where the bid-ask spread is highly competitive and you are likely to get the best price. However, most options are far less active and have fewer traders wanting to buy and sell.
Don’t chase a trade – Sometimes you will not be able to buy your option at your desired price. When this happens, do not keep raising your limit price. If you do, you may end up buying that option at too high of a price for the expected result or target price to be profitable. There will always be other trades coming your way, so stick to your plan.
Don’t over-trade – While adding to a winning position is often warranted, you should never add more than you are willing to risk. Never think that you can make up for a losing streak with one big score. That’s how gamblers get into trouble. If you even find yourself with a string of losers, stop trading. Take a breath. Think about what might have been the problem. After all that, you can consider making your next trade.
Don’t wait until the last minute to make your trade – Set a “good-til-canceled” limit price based on your profit target, rather than trying to time it near expiration. In other words, sell when price reaches your target, no matter when that happens before expiration. Strange things can happen at the end of a day. Especially at options expiration. Liquidity can easily dry up, and that means you may not be able to get a price anywhere close to what you were expecting. In addition, the time decay factor embedded in an option can cause its value to crater at the last minute.
Don’t trade without a plan – This is exactly the same as the “do” mentioned earlier. You’ve got to know your trading goals, expected profit and allowable risk. And you have to know what will have to happen to make you cut your trade short before a small loss turns into a big loss.
Don’t bet the farm – We’ve already discussed this in a few ways, but it is that important. Do not take such big risks that one losing trade will drain your account. And never think that you can make up for a string of losers with that one big win. Keep your position size between 2% and 5% of your portfolio. If the market gets exceptionally volatile, make that even smaller. You want to be sure you live to trade again tomorrow.
These 6 simple stock option trading rules can help keep your trading on track because the market owes you nothing and can be a ruthless teacher. Respect the market, and you will do just fine.
Small-cap growth stocks could be ready to turn the corner after a few years of being outshone by large-cap growth, high technology peers.
As the U.S. economy starts to recover from the shock of COVID-19 forced shutdowns, small-cap growth stocks should benefit the most. That’s because they’re largely being valued at or near historical lows. And, that’s good news for small-cap stocks, which have suffered significant under performance in recent years.
Once investors realize that small-cap stocks should have superior potential returns over the next two to three years, you’ll see small-cap stocks’ valuations and their prices rise.
Upwork (UPWK, $13.87) went public on Oct. 3, 2018, at $15 a share. In the 21 months since, the online marketplace that connects freelancers with clients has delivered losses to its IPO investors.
However, despite falling to a 52-week low of $5.14 per share in April, it’s beating the S&P 500 handily year-to-date. That’s thanks in large part to an 85% run over the past three months.
The company has gone through some rotation in the C-suite. In December, then-CEO Stephane Kasriel stepped down from the top job after leading the company since April 2015, long before it became a public company. Taking over as CEO was Hayden Brown, the company’s chief marketing and product officer.
In 2017, the last full year before Upwork went public, it had annual revenue of $202.6 million. Two years later, Upwork reported annual revenue of $300.6 million, 19% higher than in 2018, and 48% higher than in 2017. Analysts continue to expect double-digit revenue growth this year and next.
“Dividend stocks can provide investors with predictable income as well as long-term growth potential.” Motley Fool
Dividend stocks have faced strong headwinds, including payout cuts and suspensions as efforts to fight the pandemic have hampered corporate cash flows.
Yet, investors who have a moderate risk tolerance should consider pursuing a proven dividend-growth investment strategy for income and return in volatile markets. In volatile markets, protecting current income becomes more important than ever for investors. But you also want to satisfy your need for current income and capital growth.
Dividend-paying stocks tend to provide more defensive protection in adverse market environments and they tend to grow over time and protect your real purchasing power. Dividend-paying stocks also tend to have more of a value orientation.
When dividend stocks go up, you make money. When they don’t go up — you still make money (from the dividend). When a dividend stock goes down in price, it’s not all bad news, because the dividend yield (the absolute dividend amount, divided by the stock price) gets richer the more the stock falls in price.
Historically, stocks with rising dividends greatly outpaced the dividend cutters or non-dividend-paying stocks. Further, if you focused on rising-dividend stocks over non-dividend-paying stocks, you would have increased your investment by an average of 4.3% per year over this nearly 48-year study.
So, a $10,000 investment in non-dividend-paying stocks made at the beginning of this study, growing at an average annual return of 8.57%, would be worth over $500,000 today.
However, the same $10,000 investment in dividend growers over the same period at a 12.87% average annual return would be worth an incredible $3.24 million!
That’s not the only benefit. Returns from dividends have also exhibited a lower standard deviation, or variability, over time. Since the overall volatility of a stock’s total return is typically dominated by its price movements, dividends contribute a component of stability to that total return.
Looking for good dividend-paying stocks
Despite challenging economic times, certain companies have grown their dividends during previous downturns; there may be precedent for their willingness and ability to grow their dividends again. While much remains uncertain, the highest-quality companies have proven their ability to grow their dividends over time. They have demonstrated an ability to survive through a range of market environments, even raising dividends during and after previous recessions.
These companies prioritize sustaining dividends in challenging times. They are dividend-paying royalty. However, it’s advised to avoid stocks with very high yields since they could be prone to dividend cuts or suspensions. Seek dividend stocks with a fortress balance sheet providing solid cash flow, reasonable dividend payout yield, above average earnings growth and little to no debt. Avoid companies with heavier debt loads, as measured by net debt (debt minus cash) to earnings-before-interest-taxes-deprecation-and amortization (EBITDA) ratios.
Investors seeking dividend sustainability need look no further than the Dividend Aristocrats: a list of companies within the S&P 500 index that have increased their dividend payouts consecutively for 25 years or more. The 64 S&P 500 Dividend Aristocrats have raised their dividends in an era that spans the Iraq wars, the Sept. 11 terrorist attacks, the Great Recession, and now the novel coronavirus pandemic.
But while the Dividend Aristocrats list is a great place to start for identifying dividend stalwarts, you are advised to avoid the highest-yielding stocks—some of which can be value traps or worse. It is okay to look for companies that are paying a decent amount of their earnings back in the form of income, but if the price moves too high and their dividend yield drops, then you’ll sell the stock and capture the gains.
Additionally, under the recently passed 2020 CARES Act, “companies that borrow money from the federal government may not repurchase stock, pay a dividend, or make any other capital distributions until 12 months after the loan is repaid in full,” according to Goldman Sachs.
Investors should always consider their investment objectives, their comfort level and risk tolerance before investing. And, they should keep in the forefront of their mindset that investment plans do not need to change in periods of high volatility since they should be based on five years or longer time horizon.
