Category Archives: Investing

Kevin O’Leary: Financial Freedom

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Dividends have produced forty percent (40%) of market returns.

The Ten Steps to Financial Freedom, according to Kevin O’Leary, Chairman of O’Shares ETF, and better know as “Mr. Wonderful”,  are::

  1. Get committed to a plan. Start by coming up with a clear “why”. Know your purpose and incentives for wanting to achieve financial freedom.
  2. Know your numbers. You must create a budget.
  3. Cost planning. Live within your means. Think twice before spending. Cut cost in order to save 10% to 15% of every paycheck.
  4. Go to war against debt and never surrender. Debt is the opposite of passive income; it erodes your asset base while you sleep. Don’t indulge your inner spending.
  5. Income plan. Focus on increasing income more than decreasing spending. Earning more is key. Before you spend, save. Invest surplus cash before you spend. Purchase assets that pay cash flow like dividend stocks, bonds or rental real estate.
  6. Emergency planning. Your the CEO of the business of your own life. Have cash reserve of three to six months of essential expenses. Remember, your psychology is always working against you and achieving financial freedom.
  7. If it matters, measure it. Know your expenses and income. Keep track of everything to ensure you can course correct if something goes wrong.
  8. Tax planning. Think about how much money you can save with simple tax planning. Use traditional IRA or Roth IRA. Also, consider donating to charities.
  9. Financial advisor. Hire a financial coach to help manage your money.
  10. Freedom formula. Freedom is when you have enough passive income generated from your assets to cover your essential expenses.

https://youtu.be/HsUQoEOu_bE

5 ways to win your financial marathon | Regions Private Wealth Management

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Sponsored content from Regions Private Wealth Management
Jan 31, 2017, 4:41pm EST

By making a regular habit of saving and monitoring progress toward your financial goals, you can build stamina to reach the finish line and bask in the glow of a race well-run.

Whether preparing for your first marathon or your fourteenth, you know that you can’t finish the race without preparation and discipline. With 26.2 miles to cover, it’s most certainly not a quick sprint. The same can be said for financial goals.

It doesn’t matter whether you’re establishing relatively short-term goals, such as paying down credit card debt by year-end, or taking a longer view and planning for a first home, child’s college education or retirement, Regions Bank has some healthy financial habits that can move you closer to the finish line.

1. Create a plan

Going from couch potato to long-distance runner won’t happen overnight. Just as you’d need to plan a training regimen and determine milestones before tackling a long race, you’ll need to do some research and planning to figure out how to best reach your financial target.

Maybe your goal is to buy a first home, so start with some research to determine exactly what dollar amount you’ll need and when. Online savings calculators can provide details on how much you need to set aside each month to reach your goal. Once armed with that information, develop a budget around that goal and track your spending to be sure you stay on course.

2. Create a support network

A training partner can offer motivation and support before and during a race, and it’s no different with household budgets. Spouses should work together to keep tabs on their spending and savings, as teamwork can help everyone stay on track and focused on the ultimate goal.

Even kids can play a role, such as by helping to grow a college fund. By setting aside birthday or babysitting money, children can learn about the importance — and the rewards — of sacrifice and hard work.

3. Be flexible and change things up

Training with the same workout every day can not only result in losing interest, but it can make progress stagnate. If a budget is too restrictive and resulting in frustration, then it may be time to take another look. If you’ve focused on belt-tightening, think about how you can bring in additional cash to allow for some breathing room and an occasional treat. Consider working extra shifts, selling unneeded belongings, or renting out a room or parking spot.

Once you’ve made progress, look for other ways to supplement your savings. If you’re maintaining investment portfolios to help reach your goals, periodically rebalance them to make sure they reflect changing risk environments and to free up capital to take advantage of any new opportunities.

4. Adjust for the final stretch

As a big race approaches, it’s important to maintain conditioning while being wary of regimens that could bring on an injury from which you may not have time to recover. Similarly, with savings goals, as the need becomes more immediate, your savings and investment accounts will have less time to recover from a sudden dip in value, whether it’s from a market downturn or an emergency withdrawal.

For instance, when saving for retirement while in your 20s and 30s, higher-risk investments may provide greater growth potential over time. As you near retirement, however, you’ll want to start protecting the growth achieved and consider lower-risk holdings that can help preserve value.

5. Prepare for the unexpected

Life throws us curves, and it’s not unusual for a training program to get off-track for any number of reasons. Our financial goals can also be at risk, such as from unexpected home or auto repairs, a job loss or an injury. To be able to meet these challenges head-on, prepare an emergency fund to cover expenses. Experts at Regions Bank recommend saving enough to cover three to six months of expenses. If you’re not at that level yet, consider adding this purpose to your monthly budget.

By making a regular habit of saving and monitoring progress toward your financial goals, you can build stamina to reach the finish line and bask in the glow of a race well-run.

References:

  1. https://www.regions.com/Insights/Wealth?WT.ac=VanityURL_wealthinsights
  2. https://www.bizjournals.com/bizwomen/channels/cbiz/2017/01/5-ways-to-win-your-financial-marathon.html?page=all

Growth vs. Value

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“Empirical evidence suggests that value stocks outperform over the long term, even if growth has out performed value in recent years.” Bankrate

Recently, growth stocks, such as Microsoft, Amazon, Tesla and Apple, have handily outperformed value names. But it’s not always that way, and many seasoned investors think value will once again have its day, though they have been waiting on that day for more than a decade.

The difference between the two approaches are:

  • “Growth investors look for $100 stocks that could be worth $200 in a few years if the company continues to grow quickly. As such, the success of their investment relies on the expansion of the company and the market continuing to value growth stocks at a premium valuation, as measured by a P/E ratio maybe, in later years if the company continues to succeed.”
  • “Value investors look for $50 stocks that are actually worth $100 today, not in a few years, if the company continues its business plan. These investors are typically buying stocks that are out of favor now and therefore have a low valuation. They’re betting on the market’s opinion changing to become more favorable, pushing up the stock price.”

“Value investing is based on the premise that paying less for a set of future cash flows is associated with a higher expected return,” says Wes Crill, senior researcher at Dimensional Fund Advisors in Austin, Texas. “That’s one of the most fundamental tenets of investing.”

Growth investing and value investing differ in other key ways, too, as detailed in the table below.

Many of America’s most famous investors are value investors, including Warren Buffett, Charlie Munger and Ben Graham. Still, plenty of very wealthy individuals own growth stocks, including Amazon’s founder Jeff Bezos and hedge fund billionaire Bill Ackman, and even Buffett has shifted his approach to become more growth “at a reasonable price” oriented as of late.

Yet, sometime in the future, and unfortunately no one can forecast when, it appears guaranteed that value will outperform growths as an investment for a long period of time.

Typical investing wisdom might say that “when the markets are greedy, growth investors win and when they are fearful, value investors win,” says Blair Silverberg, CEO of Capital, a funding company for early-stage firms based in New York City.

If you’re an individual retail investor, it is wise to stick to fundamental investing principles or otherwise consider buying a solid index fund, such as the S&P 500 that takes a lot of the risk out of investing.

References:

  1. https://www.bankrate.com/investing/growth-investing-vs-value-investing/

Fear of Missing Out (FOMO)

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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.

References:

  1. https://content.schwab.com/web/retail/public/about-schwab/Charles-Schwab-2019-Modern-Wealth-Survey-findings-0519-9JBP.pdf
  2. https://www.aboutschwab.com/modernwealth2019
  3. https://content.schwab.com/modernwealth/?bmac=VEH

Top Americans by Wealth own Most of U.S. Equity Stocks

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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.”

U.S. Economy and Stock Markets are Highly Disconnected

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“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.

References:

  1. https://www.marketwatch.com/articles/the-disturbing-reality-fueling-this-bull-market-51598004009?mod=mw_more_headlines
  2. https://seekingalpha.com/article/4368901-stock-market-will-reconnect-economy-what#:~:text=There%20are%20two%20reasons%20that%20the%20stock%20market,other%20way%20to%20reconnect%20is%20a%20market%20crash.
  3. https://www.barchart.com/story/options/146523/inside-volatility-trading-august-25-2020

Small company, higher quality “value” stocks

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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.

References:

  1. https://www.marketwatch.com/story/a-strategy-to-outsmart-the-sp-500-bubble-2020-08-20?mod=mw_quote_news
  2. https://www.marketwatch.com/articles/a-tale-of-two-indexes-1516896321
  3. Fama, Eugene F. and French, Kenneth R., A Five-Factor Asset Pricing Model (September 2014). Fama-Miller Working Paper, Available at SSRN: https://ssrn.com/abstract=2287202 or http://dx.doi.org/10.2139/ssrn.2287202
  4. https://www.marketwatch.com/story/buy-the-best-performing-stock-sector-for-87-years-2015-03-11
  5. https://www.marketwatch.com/story/youre-loving-high-flying-growth-stocks-now-but-your-money-should-be-in-these-companies-this-market-pro-says-2020-08-20

First-Time Investors should Stop Chasing Hot Stocks | TheStreet

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“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
  • Diversification and asset allocation.

Read more: https://www.thestreet.com/personal-finance/first-time-investors-stop-chasing-hot-stocks-do-this-instead-nw

The Ultimate Growth Stock – Amazon

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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.

References:

  1. https://www.fool.com/investing/2019/11/24/if-you-invested-500-in-amazons-ipo-this-is-how-muc.aspx
  2. https://www.cnbc.com/2019/12/12/what-a-1000-dollar-investment-in-amazon-would-be-worth-after-10-years.html?__source=iosappshare%7Ccom.google.Gmail.ShareExtension

*The way splits work is that you receive more shares, but the stock price is adjusted accordingly so the value of your investment stays the same.

Microsoft Stock for Long-Term Growth and Safety

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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.