Why 30 Stocks Are Better Than 100 Or 500: How The Dow Beat The Nasdaq 1999-2019 – SPDR Dow Jones Industrial Average ETF (NYSEARCA:DIA) | Seeking Alpha

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Since its ETF’s launch in early 1999, the Nasdaq-100 actually underperformed the Dow Jones Industrial Average on a total return basis for most of 20 years, until last week.

Both the Dow and Nasdaq have outperformed the S&P 500 on a total return basis, leaving the Dow as the clear winner on a risk-adjusted basis.

Fundamentals point to the Nasdaq’s recent catch-up as a repeat of the late 1990s run-up, meaning the Dow is likely to outperform again over the next 20 years.

The Dow’s greatest advantage is its simplicity, and this should make it a leader in the trend towards direct indexing.

If I were to ask 80 investors under the age of 80 to describe the Dow Jones Industrial Average in one word, chances are the answers would include words like “narrow”, “outdated”, or even “irrelevant”.

I’m also sure a vast majority of that same sample of “young” investors would never have guessed that this old Dow index has actually outperformed the much more modern and sexy Nasdaq-100 Index on a total return basis over most of the past 20 years. In this article, I explain: the surprising past outperformance of the Dow over the Nasdaq, and advantages I believe will make the Dow a better starting point than Nasdaq or S&P for outperformance over the next 20 years.
— Read on seekingalpha.com/article/4310588-why-30-stocks-are-better-100-500-how-dow-beat-nasdaq-1999minus-2019

Medicare-for-All Plan

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Public support for a single-payer system has grown, according to a survey from the Kaiser Family Foundation (KFF).

Currently, a slight majority of Americans say they favor a national health plan in which all citizens would get insurance from a single government plan, though the level of support has narrowed in recent months.

Overall, a majority of Democrats and about half of independent voters favor a national Medicare-for-all plan while most Republicans oppose. Overall, a majority of Americans support the general ideal of Medicare-for-all.   Two-thirds (65%) of Americans say they support a government-run health plan that would compete with private insurance, often called a public option.

Medicare is the federal health insurance program created in 1965 for people ages 65 and over, regardless of income, medical history, or health status. The program was expanded in 1972 to cover certain people under age 65 who have a long-term disability. Today, Medicare plays a key role in providing health and financial security to 60 million older people and younger people with disabilities.

Medicare-for-all plan will require many employers and some individuals to pay more in taxes while eliminating both out-of-pocket costs and premiums for all Americans. And, the plan will increase taxes individuals will personally pay, but decrease their overall costs for health care.

KFF polling finds that Americans know little about how Medicare-for-all proposals would reshape the way all Americans get and pay for health care, and public support for Medicare-for-all shifts significantly when people hear arguments about potential tax increases or delays in medical tests and treatment.

Additionally, KFF polling shows many Americans falsely assume they would be able to keep their current employer provided private health insurance under a single-payer plan, suggesting another potential area for decreased support.

Medicare, in its current form, faces a number of critical issues and challenges, perhaps none greater than providing affordable, quality care to an aging population while keeping the program financially secure for future generations.  Medicare is financed by general revenues (41% in 2017), payroll tax contributions (37%), beneficiary premiums (14%), and other sources.

Two-thirds (65%) say they support a government-run health plan that would compete with private insurance, often called a public option.

U.S. – China Deal is Imminent

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China’s annual Economic Work Conference is likely to convene within the next two weeks, meaning a trade deal with the U.S. is “imminent,” according to ICBC Standard Bank Chief China Economist Jinny Yan.

www.cnbc.com/2019/11/27/icbc-us-china-deal-is-imminent-due-to-beijings-upcoming-policy-meeting.html

Cash Flow is King

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Happiness is Cash Flow

Cash flow is about understanding where money originates, according to Brian Skrobonja, founder of wealth management firm Skrobonja Financial Group LLC. and originator of the Common Sense podcast . Further, Mr. Skrobonja states that cash flow is about strategically using money to not only live your life but to create more income sources for yourself. Essentially, when you put your focus on cash flow, it solves hundreds of other personal financial challenges, according to Mr. Skrobonja.

The confusing part about cash flow is that too few people understand what this really is. They believe that a monthly budget represents cash flow. It doesn’t. A budget is used to track expenses. It focuses on limiting expenses to stay within your means (income) in order to save money.

Cash flow is essentially the money that is moving in and out.  Additionally, cash flow focuses on where your money needs to go to fulfill the long term goals that you have for your future. It allows you to direct money toward creating wealth and ultimately more income. It is a financial growth mindset.  Thus, the cash flow between your current lifestyle desires and your future lifestyle requirements is the most important financial decision you can make.

The purpose of cash flow awareness is not simply to make ends meet, but rather to properly organize the flow of money, which allows you to create wealth and avoid debt.

When you think of your cash flow, break down your annual expenses into five groupings:

  1. Debt payments
  2. Tax payments
  3. Regular monthly expenses
  4. Savings and insurance transactions
  5. Irregular expenses throughout the year

Then list in chronological order the big-ticket items you plan to spend money on in chunks over the next five to 10 years. (This would include education, transportation, home improvements, etc.)

It is important to include the assets you plan to purchase or invest in to create more income on this list. Use debt to leverage investments by acquiring assets and grow cash flows. Do not use debt to buy things that make other people richer. These leveraged investments may be assets such as a business, rental property or some other income-producing asset you plan to acquire.

Don’t think about how you will pay for these big-ticket items, just list what they are, and then circle back later to work out the details.

Stable, reliable cash flow is the only true measure of personal financial success.  Individuals cannot thrive financially, let alone feel financially secure, without positive cash flow.  Cash flow is king in personal finance; cash flow should rule everything around your personal finances. Keep an eye on your cash coming in and your money going out.  Keep in the forefront, cash flow provides an unvarnished glimpse into a person’s overall financial health.

 

Financial Literacy – A Critical Skill

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What is financial literacy?

Financial literacy is about teaching Americans how to manage their personal finances and helping them understand money issues they’re likely to face in their lifetimes.

It is an important skillset missing in most Americans financial tool boxes and often become lessons that are improperly or painfully learned by trial and error.

Basically, financial literacy is about effectively managing one’s money. It is an essential personal skill that will benefit individuals throughout their lives – and it is not skill that everybody learns.

With money, such as wages, coming in and expenses going out, with due dates, finance charges and fees attached to invoices and bills, and with the overall responsibility of making the right decisions about major purchases and investments consistently, managing money can be challenging for most Americans.

Americans would think that because the financial stakes are so high and the skills of managing money are so essential that this would be a skill that gets taught in high school or even college. Unfortunately, personal finance is not taught in educational institutions at any level in the United States. It is not taught in K-12 education, undergraduate or even post graduate levels unless an individual is majoring in finance.

Financial literacy and managing money require a fundamental understanding of personal cash flow, net worth, debt, inflation, the purchasing power of money, and a willingness to embrace personal responsibility. That means paying bills in a timely manner, saving for emergencies and retirement, and avoiding excessive debt. It is important that individuals accept the fact that sometimes they have to sacrifice immediate demands and desires for long-term gain.

Countless stories exist regarding Americans being taken advantage of by bad actors, criminals and financial professionals pushing ill-suited products to unsuspecting individuals. Recently, a story was told how an unscrupulous stock broker convinced an unsuspecting individual, when he was younger, to invest their nest egg in a sure thing stock tip. Unfortunately, the only sure thing regarding the tip was that the unsuspecting victim would watch their nest egg shrink and ultimately disappear.

Personally, the author, as a young Naval Officer, fail victim to a well-meaning financial adviser selling high front loaded fee mutual funds to military officers. After a week of mulling over the thought of ten cents of every dollar invested would go to the adviser and the financial firm he represented, I overturned the decision to invest and pulled my capital from the company, minus the ten percent. Subsequently, I invested my hard earned capital in a no-load fund mutual fund. Fortunately, the financial lesson learned came at a reasonably small cost.

Thus, a key take away is that financial literacy is an essential skill for Americans; a skill that is not thought in our schools, but should be. And, financial literacy is critical for individuals if they desire to get their personal finances on track.

What follows are a few financial literacy tips that can help a person get started.

  • Create a budget. The first step toward taking control of one’s financial life is to find out how much money one takes in and how much one spends.
  • Pay yourself first. Consider automatically depositing a certain amount of wages into ones savings account each payday.
  • Build an emergency fund. Set aside three to six months of savings in a bank account or money market account to cover unplanned expenses such as automobile repairs or medical bills. Avoid using credit cards.
  • Eliminate credit card debt. Incidental purchases on credit add up. Paying only the minimum amount due each month on credit cards can result in finance charges that quickly make small purchases become very costly. If possible, pay the full balance every month or cut up your credit cards.
  • Protect personal information. Take steps to reduce the risk of identity theft. Be skeptical and know whom your sharing your personal information; store personal information securely or dispose of by shredding. Maintain appropriate security on computers and other electronic devices. Check out the warning signs that someone might be using your personal information.
  • Order credit report. Make sure the information is accurate, complete, and up-to-date. If errors are found, dispute them.
  • Comparison shop for home mortgages. A mortgage is a product, just like a car, so the price and terms are negotiable. Compare all the costs involved in obtaining a mortgage. Shopping, comparing, and negotiating can save thousands of dollars.

Bottom line, to be financially literate means having the ability to not let money – or the lack of it – get in the way of one’s happiness as one works hard to build an American dream complete with financial security and a fulfilling retirement.

Net Worth and Measures of Financial Health

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Source: MyMoney.gov

For many households, financial health is measured by income. While income is an important component of financial health, it is only part of the equation.

Some experts and academics believe that an individual’s net worth is a better measure of financial health than income. Net worth or wealth can determine if a family has the wherewithal to deal with a financial crisis, such as the loss of employment or long-term sickness.  And it also allows for investments in a home, small business and higher education. In other words, a household with no wealth or negative net worth may not be financially healthy despite a high salary.

euro-seem-money-finance

Photo by Pixabay on Pexels.com

The type of assets held by a household also affects its financial health, with illiquid assets and short-term liabilities a greater potential risk than liquid assets and long-term debt.

For many financial educators and households, assessing a household’s net worth is the start of the conversation. It allows financial advisers or households to create a financial plan that considers assets and liabilities which can lead to better financial health and outcome.

Net worth considerations would also provide policymakers with a more accurate picture of financial health to assess middle class economic security across different demographic populations.

There are other reasonable approaches to considering overall financial health or well-being. For example, the Center for Financial Services Innovation (CFSI) looks at four components (spending, saving, borrowing, and planning) and eight indicators of financial health as well as data that can be collected to make the financial health assessment. The data collected to measure the financial health for each component range from the difference between income and expenses (for spending) to the debt-to-income ratio (for borrowing) to the type and extent of insurance coverage (for planning).

The type of assets also matters for financial health. For example, CFSI distinguishes between liquid and illiquid assets by pointing out that liquid assets are “important for coping with an unexpected expense,” while [illiquid] long-term savings promote financial security.27

Financial well-being has been identified as a common outcome goal of financial education efforts.28 CFPB has developed a robust and validated scale to measure a person’s sense of financial well-being, which CFPB defines as the “state of being wherein a person can fully meet current and ongoing financial obligations, can feel secure in their financial future and is able to make choices that allow them to enjoy life.”29 While this measure is subjective, a number of trackable and objective factors are strongly associated with a person’s level of financial well-being, most notably having liquid savings.

27. Parker, Sarah, Castillo, Nancy, Garon, Thea, and Levy, Rob,“Eight Ways to Measure Financial Health”,Center for Financial Services Innovation, May 2016, available at: https://s3.amazonaws.com/cfsi-innovation-files-2018/wp-content/uploads/2016/05/09212818/Consumer-FinHealth-Metrics-FINAL_May.pdf.

28. For example, see Financial Literacy and Education Commission, “Promoting Financial Success in the United States: National Strategy for Financial Literacy 2011”, available at: https://www.treasury.gov/resource-center/financial-education/Documents/NationalStrategyBook_12310%20(2).

29. “Financial Well-being: What it means and how to help”, Consumer Financial Protection Bureau, 2015, available at: https://www.consumerfinance.gov/ data-research/research-reports/financial-well-being/.

Magical Penny versus Magic of Compound Interest

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silver and gold coins

Photo by Pixabay on Pexels.com

One simple financial question to ask yourself and colleagues:

“If you had a choice, would you rather receive $200,000 cash or a penny that doubles in value every day?”

Not surprisingly, most people choose the $200,000.  It is the bird in the hand concept.

But in reality, the magical penny would actually leave individuals much better off. Due to the magic of compound interest, a penny that doubles in value every day would be worth more than $10 million after only a month!

The compound interest equation which follows applies:

FV = PV(1+r)n, where FV is future value, PV is present value, r is the interest rate per period, and n is the number of compounding periods.

Compounding is the effect where an investment earns interest not only on the principal component but also gives interest on interest. So compounding is basically interest on interest. When we say that the investment will be compounded daily, it means that we will earn interest on the daily interest along with the principal.

The concept is such that it assumes that the interest earned every day is reinvested at the same rate and will get increased as the time passes.

Animal Spirits

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Animal spirits refers the state of confidence or pessimism held by consumers, businesses and investors. Regarding financial markets, they represent the emotions of confidence, hope, fear, and pessimism that can affect an investor’s financial decision making, which in turn can fuel or hamper economic growth.

If spirits are low, then confidence levels will be low, which will drive down a promising market—even if the market or economy fundamentals are strong.

Likewise, if spirits are high, confidence among participants in the economy will be high, and market prices will soar.

According to the theory behind animal spirits, the decisions of investors and business leaders are based on intuition and the behavior of their competitors or other investors rather than on fundamental analysis.

Famous British economist, John Maynard Keynes believed that in times of economic upheaval, irrational thoughts might influence people as they pursue their financial self-interests. In 1936, Keyne published, The General Theory of Employment, Interest, and Money, where he postulated that trying to estimate the future yield of various stocks, companies, or financial activities using general knowledge and available insight “amounts to little and sometimes to nothing.”

Keynes referred to these psychological factors that make investors jump into the equity market — in the face of deep uncertainty and volatility, as animal spirits. He thought, only a manic, driven, strong-willed person would put capital at risk in periods of high uncertainty and volatility.

When animal spirits are strong, investment is sufficient to maintain aggregate demand; when they lag, aggregate demand falls, and the economy lapses into depression.

It is assumed that the only way people can make investment decisions in an uncertain and extremely volatile environment is if animal spirits guide them.

Source: CARLA TARDI, Animal Spirits, Investopedia, Updated Apr 20, 2019

Democracy and Economic Opportunity

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Frustration with polarizing politicians, unequal wealth distribution and personal economic opportunities breed dissatisfaction with democracy in America

“The inherent vice of capitalism is the unequal sharing of blessings; the inherent virtue of socialism is the equal sharing of miseries.”
– Winston Churchill

A Pew Research Center survey found that the discontent that many citizens of democratic countries feel are tied to concerns about the their respective domestic economies, individual rights and out-of-touch elites. Furthermore, most believe elections bring little change, that politicians are corrupt and out of touch and that courts do not treat people fairly. On the other hand, citizens are more positive about how well their countries protect free expression, provide economic opportunity and ensure public safety.

Several surveys of how well democracy is working for the average citizen vary considerably across nations. In Europe, for example, more than six-in-ten Swedes and Dutch are satisfied with the current state of democracy, while large majorities in Italy, Spain and Greece are dissatisfied, according to the Pew Research Center survey. Thus, it is safe to assume that citizens per capita income and their respective country’s economic business cycle seem to impact democratic dissatisfaction differently in some advanced and emerging economies.

Furthermore, it appears that there is a considerable correlation between the prevailing views of the domestic economy and the assessments of democratic performance. If the domestic economy is growing and the perceived distribution of wealth are seen as relatively equitable, then people tend to have a more favorable view of democracy.

Source: RICHARD WIKE, LAURA SILVER, AND, ALEXANDRA CASTILLO, “Many Across the Globe Are Dissatisfied With How Democracy Is Working”, APRIL 29, 2019

Importance of Embracing Failing

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Everyone, and we mean everyone, experiences failure in life.

The difference is that most successful people have embrace and learned invaluable lessons from failure. Essentially, when they fail; when they embrace failure, they tend to learn lessons from the experience. They tend to grow and mature. They achieve new understandings and perspectives on life, love, business, money, investments, relationships, and people.

You can’t control the volatility of the stock market, market forces, the miserable weather or readers dismal response to your blog post. What you can control is your reaction to it.

We must learn how to embrace failure positively and understand that fearing failure only holds us back from realizing our full potential. By recognizing and accepting that everyone fails, we are better able to embrace failure as a regular part of life. For example, American President Lincoln and British Prime Minister Churchill both failed multiple attempts to get elected to public office until becoming President of the United States and Prime Minister of Great Britain, respectively. Thus, since most of what we learn is from trial and error, beginning when we fall down again and again trying to walk, it’s only natural to recognize that everyone fails … and often.

“Winning is great, sure, but if you are really going to do something in life, the secret is learning how to lose. Nobody goes undefeated all the time. If you can pick up after a crushing defeat, and go on to win again, you are going to be a champion someday.” William Rudolph

Thomas Edison, one of the greatest inventors in modern history, once said, “Genius is one percent inspiration, ninety-nine percent perspiration.” While experimenting on the incandescent light bulb, Edison exclaimed to a reporter’s question, “I have not failed. I’ve just found 10,000 ways that won’t work.” Success typically comes after numerous failures. There’s something magical that happens when you don’t give up.

Failure can be an immense asset if we are trying to improve, grow, learn, or do something new. It’s the necessary feature that precedes nearly all successes. And, there’s nothing shameful about being wrong, about changing course. Each time it happens we have new options. Problems can become opportunities and new insights to solve old challenges. Deep down we know that our past failures have contributed immensely to our personal growth.

People fail in small ways all the time. To gain the benefits, we have to learned from the failure. The simple truth is – no great success was ever achieved without failure. It may be one seemily life changing failure. Or a series of failures. But, whether we like it or not, failure is a necessary stepping stone to reaching our ultimate goals and achieving our dreams.