Friday, April 30, 2010

Think Long Term

The problem a lot of people have with investing is, they focus on short term performance. This is not entirely their fault. Newspapers publish stock and mutual fund performance daily. Magazines report monthly, quarterly and annual results. While these measurements are interesting, they don't tell the full story. How did your stock, mutual fund, or ETF perform over the past 3, 5, and 10 year periods? Do they perform in good and bad markets? How do they compare with their peers? These are some good questions to ask before you buy (or sell) your investment. This brings up another problem for investors. What is the time frame for your investments? Is it just one year? Most likely not. Most people are investing for 10, 20, or 30 years down the road. Even retirees should have some money in the market. The average 65 year old has a very good chance to live to age 85 or longer. That's 20+ years! Twenty years is a long time to be in CD's earning 1-3% which barely keeps up with inflation, and when taxes are factored in, CD's barely make money at all. If you have enough money to live off the income your CD's generate then that's great, don't take the extra risk. But most people need more growth than that. Sure, stocks and mutual funds have risks, but with risk comes reward. The trick is finding the balance!

Wednesday, April 28, 2010

Tuesday, April 27, 2010

Don't Believe the Hype!

If history has taught us anything, it's that the stock market goes up and it goes down. Over time, it tends to go up more than it goes down. There is never a straight line in either direction. Some people speculate that the recent advance was too fast and we're due for a correction. Others think that traders are just booking their profits over the last 3 months. Still others think that the recent announcements of regulatory changes in the industry is causing a black cloud to form over Wall Street. It's probably a mixture of all three. There are too many variables that influence the stock markets for any one theory to predict correctly. That is both the fun and frustration about investing. So what's a person to do? A few rules of thumb:

  • The best time to buy is when you have the money.
  • Buy on a regular basis. When the market is up you'll buy less, and when it's down you'll buy more.
  • Diversify your portfolio with different asset classes. Besides stocks, you need bonds, cash, real estate, commodities, and even gold or silver.
  • Rebalance or adjust your portfolio regularly. You need to have a more tactical approach these days.
  • If you need help, hire a coach. Talk to a financial advisor you trust. You need a customized plan for your situation, not a cookie cutter strategy you found in a book or magazine.
Don't give up! Investing is a marathon race, not a sprint. You need to consider your time frame, goals, and objectives. What is right for someone else, may not be right for you. For most people, the biggest lesson from this past couple of years was that you need to save more and spend less. There are positive things happening in the world, don't focus on the negative. Turn off CNBC and talk radio and think positive!

Friday, April 23, 2010

Bond myths

For people who have become disillusioned by the stock market but still can't see the value in putting all of your money in low yielding CD's, bonds could be a nice compromise. Let me dispel a few myths about buying bonds. A lot of people think that you have to have a lot of money to buy bonds. This is not true. Bonds are sold in increments of $1000. Now while it is not practical to buy one bond, you don't need to pony up $50,000 or $100,000 to get in the game either. Ask your broker to find you some odd lots. These are small baskets of bonds sold on the secondary market in weird or odd increments, like 8 or 13. Someone who needed to sell their bonds prematurely, sold them back to their broker, who in turn placed them in inventory. Since most big players don't want odd lots, they typically sell at a deeper discount, so you can get a good buy if you find some available. Another common myth is that you have to own bonds for 20 or 30 years. While bonds are typically sold in the primary market with 15, 20, or even 30 year maturities, you can find bonds in the secondary market that mature in 5 years, 3 or even next year. Remember, the bond market is huge, way bigger than the stock market. Ask your broker to search for the time frame you need. One strategy is to set up a bond ladder. It works like this: Buy a portfolio of bonds with staggered maturity dates. Some that mature in 3 years, some in 4, some in 5, and so on. That way, you will have money come available in each time period that you can use for something else or reinvest in new bonds. Then you won't be in a position to have to sell something at a loss in case of an emergency. Most brokers don't deal in bonds that much, that's why they peddle stocks and mutual funds, but if you find a broker that knows about bonds, he can make you some money without the downside risk of the stock market.

Wednesday, April 21, 2010

Tuesday, April 20, 2010

The Best of Thoughts from Scott

Today's blog post is a "Best of" piece from March 29, 2009. I thought it was still appropriate, as are many articles which discuss the virtues of saving money by spending it wisely. It's called, Don't Buy Stuff You Can't Afford, a title I got from an SNL skit. So if you're seeing this for the second time, I hope you'll enjoy it as much as the first: Enjoy!

Friday, April 16, 2010

Stocks, bonds, or mutual funds?

If you do much browsing of financial websites and investment magazines, you'll quickly notice a trend. There are scores of articles touting the "best stocks to buy now" or "must have mutual funds". Some even discuss the virtues of investing in bonds or some other fixed income investment. The trouble with these articles is that the author does not know anything about you or your situation. What might be good advice for one person, may be completely wrong for you. These authors don't know how much money you have already invested in stocks, bonds, or mutual funds. They don't know if you are a conservative investor or an aggressive one. They don't know if you are looking for income or are mainly interesting in accumulating assets. They don't know how long you have been investing or what your income and net worth is. They don't know your goals and objectives for your investments. These are all important questions that need to be answered before recommending which stocks, bonds, or mutual funds are the best for you. Maybe it's none of the above! So while these articles can be insightful and entertaining, they just cannot take the place of a face to face meeting between yourself and a competent financial advisor. Do yourself a favor, go find one!

Wednesday, April 14, 2010

Tuesday, April 13, 2010

Bloggers Bug

As a member of the new Bloggers Bug website, the best website for bloggers and people who like to read blogs, I am linking today's blog to a new post I wrote for that site. I decided to take a day off from writing about financial matters and expound on the virtues of a man known in St. Louis as El Hombre. Others might know him by his given name, Albert Pujols:

Enjoy the moment St. Louis Cardinals fans!

Wednesday, April 7, 2010

How much to save?

If the recent economic recession and stock market crash of 2008 has taught Americans anything, it's that you can't count on your house or your investment portfolio to make money for you all the time. The lesson? You need to save some money! In 1975, the personal savings rate for Americans hit a high of 14.6%. As recently as 2008, the savings rate dropped below 1%, but has since climbed to around 4%. Why have personal savings rates dropped? Two main reasons. Number one: easy credit. Before most Americans had credit cards, people had to save before they bought something. That's right, it was customary to pay cash for just about everything, even cars! Now that most people can qualify for a credit card, people have learned not to save because they can buy on credit and pay off over time. The second reason people stopped saving as much is due to something called the "wealth effect". When stock and mutual fund portfolios soared in the late 90's and home prices spiked in the period from 2000 to 2006, this created a lot of money for the people who were either shrewd enough or lucky enough to sell at the right time and realize their profits. People basically said to themselves why should I save 10% of my income when I can make 30% in the stock market or 100% in real estate over a 5 year period! But as home prices declined after 2006 and the stock market crashed 37% in 2008, suddenly this line of thinking was flawed. Prudent financial advisors will tell you that you need to put away at least 10% of your gross income into some kind of savings vehicle. For those that lost a lot or never got in the habit of saving, they might need to sock away 15-20% to make retirement feasible. Depending on your income level and desired lifestyle during your retirement years, coupled with the fact that people live longer nowadays, you might need $1-2 million in the bank by the time you retire. So stop buying those afternoon lattes and skip the sales at the shoe stores, you need to look at where you are spending your money and start saving more of that green!

Friday, April 2, 2010

Dow 11,000

The Dow Jones Industrial Average (DJIA), or The Dow, is now within 73 points of breaking through 11,000. What does this mean? It actually doesn't mean anything other than it's a nice round number and it's a psychological barrier for many. Of course it's not as exciting climbing back through 10,000 and now hopefully 11,000 because we've been there before. At least once again, we are moving in the right direction. I had a client call me the other day asking if we were due for a correction. Well, nobody knows. There is no formula that says if the Dow goes up this much, in this amount of time, then it must go down. No, the stock market does what the stock market wants to do. No one is in control of it. The market will confound, perplex, frustrate, excite, and fool you every time. But the market is efficient and an effective barometer on what is happening with the stocks of companies that are represented by the index. So go ahead, watch The Dow, map it, chart it, look at the trends, do whatever you want to do, but know this, you can not accurately predict what the market will do, anymore than you can tame a wild mustang horse and make it your pet.