wise investing made simple

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Bonds Cut Both Ways

Wednesday, January 15th, 2014

Bad news: The government is up to its ears in debt.

Good news: The government is up to its ears in debt!

While it may seem strange to get excited about your government’s overspending, it actually can be a boon to investors. Many people don’t understand the basics of government debt. A government doesn’t simply overdraw its bank account, nor does it sell itself to the Chinese as some pundits claim.

When a government needs money, it issues bonds. Those bonds are famous for many purposes, particularly war efforts and for a huge array of construction projects. So when you hear that a government is bonding a project, it is creating an investment opportunity.

And many people don’t even realize that they are buying government bonds. Savings bonds aren’t just long-term savings accounts. They are borrowing tools of the government.

So bonds are all around us, and we have many opportunities to buy them. As a result, if you use good bond investment tips to make educated choices, you can take advantage of the government’s expenditures.

It’s actually parallel to borrowing by individuals. If you need something and don’t have the cash for it, you can pay with a credit card. Of course, the big difference in your borrowing and the government’s borrowing is interest rates.

Your credit card is going to charge you a whole lot more interest than the government will pay on its bonds. That’s why consumer debt is bad.

The government is essentially the rooster in charge of the hen house: It sets the interest rates that it will pay to those from whom it’s borrowing money.

Try that with your mortgage.

So although you’ll never get a very high rate of return on a government bond, they are a good investment for several reasons. First, they are secure. If you want to escape the volatility of a stock market, with a 12% gain one year and a 12% loss the next, you can safely ensconce your money in bonds. You won’t make tons of money, but you will not lose any.

Second, they are readily available. A little time online and you can purchase bonds for yourself, or even give them as a gift. Bond purchases are also simple. You make the transaction and you can access your bonds electronically at any time. Upon their maturity, you can redeem them for cash.

Finally, there’s a positive social cost with bonds. You’re not day-trading somebody out of their retirement funds. And you’re doing something positive to help your community. The money you invest in municipal bonds might be financing a school, bridge, or government facility that will benefit you. And you’re helping make it happen.

Somebody makes money on every type of debt. If you buy bonds, you’re the lender. You have taken over the bank’s role, and you get the privilege of receiving money in return for letting someone else use your money for a little while.

Bonds hold appeal to investors because they are secure, simple, and socially beneficial.

Choosing the Best Investment Strategies

Thursday, August 2nd, 2012

When it comes to growing your wealth, investing is one of the most effective ways to get the job done. Unless you invest, you’re not even going to be able to keep up with the rate of inflation. If you are interested in investing, you can’t just pick any strategy and get to your goals. You have to spend some time to make sure that you pick the best investment strategies along the way.

Here are some of the more popular investment strategies out there for you to choose from:

1. Value Investing

One popular investing strategy is value investing. With value investing, the investor tries to find investment options that are undervalued in the market. For example, the investor would use valuation multiples to figure out which stocks are trading below their value. Then the investor buys the stock and waits for the market to correct itself.

2. Dollar Cost Averaging

Dollar cost averaging is another strategy that many investors use for a long-term method. With dollar cost averaging, the investor chooses a particular investment to keep putting money into over a long period of time.

For example, an investor may decide to put $500 into a particular stock every month. This way, he buys more shares of the stock when the price is low, and fewer shares when the price is high. It helps reduce the risk of putting a large amount of money into a stock all at once.

3. Contrarian Investing

Using a contrarian investing strategy is another popular method that many investors are starting to look at. Warren Buffet is the most prominent investor who uses this strategy. With contrarian investing, you buy a stock when everyone else is dumping it.

When a company gets some bad news, the market often punishes it more than it deserves to be punished. Because of this, it provides a valuable buying opportunity for the investor who purchases the stock at these prices. Then when the company starts to gain value, it will provide even more profit for the investor who decided to buy when the prices were low.

Any of these investment strategies can work under the right circumstances. If you are unfamiliar with investing, you may want to contact an experienced financial advisor likeWalter Wisniewski of Paragon Capital. An advisor will help you make sense of these investment strategies so that you can maximize the performance of your portfolio.

Making The Stock Market Work For You

Thursday, May 24th, 2012

The savvy investor is able to make money in any market, up, down or neutral. He is also able to effectively use the money that he already has invested in the stock market to make more money.

Below are some of the ways in which you can effectively use money that you already have in the stock market to make you richer:

1) Invest an appropriate percentage of your portfolio in dividend stocks. 

The blue-chip dividend stocks that holds its value is one of the best investments that any stock market investor can make. These investments hold the value of the portfolio and give the investor the freedom to take more speculative risks with other investments.

The holy grail of dividend investing is a blue-chip company that does not ever slash its dividend. These companies can easily be found, as there are many websites dedicated to the specific purpose of monitoring the best dividend stocks.

2) Manage risk with your more speculative investments. 

Once you have the basis of your portfolio set in stone, you can begin the process of really living your money by a managed portfolio of speculative investments. The word “speculative” in and of itself sometimes conjures up negative images to the unseasoned investor. However, the word is simply use two separate different classes of investments. Properly managed, any group of investments has the ability to work out quite well over the long term for an investor.

Penny stocks are one of those speculative investments that require risk management in order to work. However, the best penny stocks are just as reputable as the best blue-chip companies. The only difference is that newer companies often have not had the time to establish themselves within their industries. There are also many websites dedicated to the best penny stocks to buy. Make sure that you are filtering the information that you take as objective, and you will do quite well with the speculative investments that have the ability to make you more money than investments with less exposure to the market.

3) Take advantage of stock splits and other moneymaking events. 

Many people miss out on easy money because they do not read the reports that are sent to them by companies and brokerage houses. Very often, these reports contain valuable information about stock splits and givebacks that simply require a signature or a return letter in order to implement.

When it comes to dabbling in the stock markets, knowledge is always power and you should never be afraid to research stocks as well as trends in the markets.  While it may seem intimidating, investing in the stock markets can have incredibly high returns that can pay off in terms of your retirement.  So instead of shying away from the stocks, consider responsibly giving it a go.

Wise Investing Made Simple Review Conclusion: The Big Rocks

Friday, February 8th, 2008

For the past several weeks, I’ve been working my way through the book Wise Investing Made Simple by Larry Swedroe. The first review covers chapters 1-8, the second review is chapters 9-16, the third review is chapters 17-22, and this is the conclusion of the series.

So far, I’ve found Wise Investing Made Simple very informative. Most of what I’ve learned from it involves thinking critically about the assumptions I hold, and I’ve found that very valuable. Investing as a concept is so foreign to me that my brain accepts commonly spoken ideas as the truth a lot more readily than I would have thought. I’ve especially enjoyed some of the examples and stories used to illustrate points. I don’t think I will ever forget the idea about finding a $20 on the ground and then abandoning your job to search for $20 bills for the rest of your life. How silly would that be?

The end of the book basically asks you to examine what is important to you. It brings forth the “Big Rocks” theory, that I have heard several times before as many of you have I am sure, and talks about deciding what the Big Rocks are in your life. For those of you unfamiliar with the concept, if you imagine your life as a glass jar, you fill the jar with big rocks, then pour gravel into the spaces, then sand, and finally water. The idea is, if you don’t follow that order, you’ll never get the big rocks in the jar at all. The big rocks symbolize what is truly important to you – family, love, faith, your dreams, whatever you place the most value on in your life. The smaller stuff is progressively less important.

By adopting an active management strategy, you focus on the smaller rocks in life at the expense of the bigger rocks. Now, I don’t buy this 100%. There are select people, I think, that active management *is* a big rock for. But, I am not one of them. I have far too many other things in my life I would like to focus my time and energy on. The book then has examples of both how focusing on investing strategies takes time away from what is important (relationships, family) and then examples from Swedroe’s own life of how passive management has allowed him time to spend involved in his kids’ lives in a positive manner. So the take home lesson really is – what do you value most? Knowing that will help you decide how active a role you want to have to take in managing your investments.

The end of the book goes through examples (as far as asset allocation) of some “Big Rocks” portfolios and how to choose a financial advisor. There is a lot of emphasis on having a plan and a goal in investing, and that makes sense to me. The question the book asks is would you set off on a long trip without a map or directions, and I can say, I don’t. And along that line of thinking, I do have financial goals, but I’d never really thought about specific investment goals and I certainly do not have a roadmap to the future. But of course, I want to be able to retire and not starve, so it’d be more than prudent to start thinking about goals.

All in all, the book has convinced me I need to see some sort of financial planner. And, hopefully I can use the tips in the book to help choose one. I thought the book was a very easy read overall and contained a lot of useful “thinking” material. This isn’t a “how-to-do” book as much as a “how-to-challenge-assumptions” book, and I enjoy thinking. :)

Next week, I’m going to start figuring out what my plan is – or at least, see if the book I bought will help me. I used my Barnes and Noble store credit to buy “The Number” by Lee Eisenberg and theoretically, it should help me figure out how much I need to save for retirement. We’ll see, I haven’t quite started the book yet. :)

Wise Investing Made Simple Review Part 3: Information and What To Do With It

Friday, February 1st, 2008

For the past several weeks, I’ve been working my way through the book Wise Investing Made Simple by Larry Swedroe. The first review covers chapters 1-8, the second review is chapters 9-16, and this review is chapters 17-22. Come back next week for the conclusion of the series!

Where we left off last week, Swedroe had addressed several myths in investing and shown how when examined, they didn’t hold water. This section of the book continues that theme, but takes a slightly different tack. Understanding information – what is useful and what is not – is important to being able to choose an investment strategy, and Swedroe looks at some little-discussed but important information as well as some much discussed that is widely misused and looks at what it all means.

Uniform Prudent Investor Act

According to Swedroe, this act is law in virtually all states. The act governs the investment activities of trustees and effectively makes passive investing the standard upon which all fiduciaries (basically, in my understanding, a fancy word for trustee) should be judged. It addressed diversification and cost control as important elements to prudent investing. So the question is, if it is law to use a passive investing strategy for those who have their money in trust for them to protect them, do we think we can come up with an even better strategy consistently? I don’t think I can.

Economic Forecasts and Market Forecasts

Economic forecasts are what market forecasts are based on. Looking at forecasts and leading investment research from 1970 to 1995, a number of key and disturbing points can be noted if you want to use forecasts to predict the future:

  • 46 out of 48 economists missed correctly predicting the turning points in the economy
  • Economists forecasting skill is worse statistically than pure chance
  • No specific economic forecasters lead the pack in accuracy
  • Consensus forecasts offer little improvement

This is what is used to create market forecasts. Knowing this, it seems to me that market forecasts are a game of chance at best. In fact, Swedroe compares market forecasts to astrology (a guessing game) and says too many people treat them as astronomy (a science) instead.

What If Everyone Indexed?

This was one of my biggest questions going into the book. If passive investing is the winning strategy, and investing in index funds is a key component of passive investing, what would happen if the majority really did just invest in index funds? Would it actually work any longer?

The reality is that is unlikely to happen – institutions still only invest about 40% of assets as an average in passive strategies and individuals as a whole have about 90% of assets in stocks or actively managed funds. But even if that went to 100% passive (unlikely) there is still trading activity from the activity of individuals exercising stock options, liquidating estates, etc and companies buying and selling companies through mergers and acquisitions.

There’s also a story here about how the trend to passive investing happens. Basically, as a person has bad active management experience, they become more likely to go a passive investing route. Behavioral studies indicate that what initiates the change is bad experiences, not just recognizing that your active management success has been luck. That shifts the “competition” in active management to be tougher and tougher (as only successful investors stay with it). This means in most cases, it ends up better to not play the game but instead, benefit from the most successful setting the tone for the overall market.

Investing as Entertainment

Follow TV market gurus and pick their stock picks – they rise for a short time (as everyone watching buys them) and then just bottom out. This is basically the same as thinking you have specialized investing information because you watched a TV show which was nationally televised. There’s a quote I really liked here from Steve Forbes of Forbes magazine: “You make more money selling the advice than following it.”

So, overall, I learned that there is actually in our legal code an prudent investment strategy, and that economic and market forecasts are kind of like predicting the weather… sometimes it works (today we are supposed to have 3-10 inches of snow and that seems to be coming true) and sometimes it doesn’t (Tuesday we were also supposed to have 3-10 inches of snow and we ended up with a light dusting). Next week we’ll finish off the book by looking at the strategies and portfolios that Swedroe recommends.