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Picking Safe Investments for Retirement

There is a difference between investments that are currently making money for you and investments that will be safe into your retirement years. A sad example of investors who did not exercise due diligence with their investments is the Bernie Madoff pyramid scheme. One hundred seventy-six individuals, banks, pension funds, and charities were invested with Madoff and happy to be getting a great return on their money. When the Madoff house of cards collapsed there were $65 billion in faked gains and investors lost about $18 billion of their investment capital. Picking safe investments for retirement is a skill separate from making money in stocks, real estate, and other investment vehicles. The fact of the matter is that when you are retired you will want to enjoy retirement and be spending all of your time watching your portfolio. How can you invest safely for retirement and not end up like Madoff’s clients?

Picking Safe Investments for Retirement: What Are Some Choices?

  • US Treasuries
  • Inflation Protected Treasuries
  • AAA Corporate Bonds
  • Dividend Stocks
  • Real Estate Investment Trusts
  • ETFs

Picking Safe Investments for Retirement: US Treasures, Inflation Protected

In our article about how to invest without losing any money, we mentioned US Treasuries.

US Treasury bills have maturities of a year or less. US Treasury notes have maturities from two to ten years. And, US Treasury bonds have maturities of ten to 30 years. Each of these investment vehicles is backed by the “full faith and credit” of the US government. The risk of loss of any of these if held to maturity is nil.

How to invest without losing any money in US Treasuries is to hold them to maturity or only sell them at a profit. Investors lose money in treasuries if they buy when interest rates are low and sell when rates are high. If you buy treasuries when rates are really high you have the choice of holding to maturity and enjoying the return on investment or selling for a short term profit.

If you expect to need to use the principal from your investments over the years, construct a ladder of Treasury bills, notes, and bonds so that you will not need to sell bonds at a loss due to high interest rates.

The inflation protect variety of Treasury is a good idea if you expect inflation to take hold again like in the 1970’s. In such a case the return on the Treasury is adjusted for inflation.

Picking Safe Investments for Retirement: AAA Corporate Bonds

AAA investment grade corporate bonds are about as safe as US Treasuries. The two US companies that issue AAA grade bonds are Johnson & Johnson and Microsoft. As with Treasuries, create a ladder of bond maturities so that you do not need to sell long term bonds at the wrong time.

Picking Safe Investments for Retirement: Dividend Stocks

In this case, you do not necessarily want the highest dividend. What you want is the most secure dividend. The Motley Fool published a list of companies that have been paying dividends for more than a century.

  • Johnson Controls
  • Stanley Black & Decker
  • ExxonMobil
  • Eli Lilly
  • Consolidate Edison
  • UGI
  • Procter & Gamble
  • Coca Cola
  • Colgate Palmolive
  • York Water

In retirement, it is a nice thing to get a dividend check or two every quarter. And, it is nicer, if the dividends are likely never to stop. If the past is any guide, these companies are a good bet for retirement investments.

Picking Safe Investments for Retirement: REITs, Real Estate Investment Trusts

The rationale for picking a real estate investment trust is that these investments tend to do well even when the stock market falters. And these investments pay dividends as well.

Picking Safe Investments for Retirement: ETFs

In retirement it is a good idea not to put all of your investment eggs in one basket. Thus, investing in a mix of US Treasuries, corporate bonds, dividend stocks, and REITs is a good idea. For the stock market in general, an ETF or exchange traded fund is a good way to benefit from the steady rise in value of the market while avoiding losses from an individual stock.


Most Reliable Criteria for Picking Investments

The stock market has had an impressive rally. Those who chose the right stocks a few years ago have done very well. Anyone who bought Apple in November of 2008 for $12.88 a share has a stock that today is selling for $189 a share. Likewise, Alphabet (Google) sold for $142 a share in December of 2008 and sells for $1,120 today. On the other hand, General Electric sold for $8 a share in January of 2009 and sells for $13 today. How could you have predicted which of these investments would go up in value and which would stagnate? What are the most reliable criteria for picking investments?

Most Reliable Criteria for Picking Investments: Fundamental Analysis

This approach looks to the future of an investment as determined by its current status. Is a company making money and is its business plan such that it will continue to make money, and more of it, in the future? The intrinsic value of an investment is a reliable guide to investing.

The intrinsic value of a stock is the expected company cash flow discounted to current dollars. It is a discounted cash flow valuation. An inherent weakness in this concept is that too often the medium and long term prospects of a company and its stock price are not clear.

Warren Buffett, who uses this concept, and learned from its creator, Benjamin Graham, said something interesting in this regard. He said that he tended to avoid tech stocks because he could not accurately predict how their products would be doing five years hence in the fast moving tech world. On the other hand, he was pretty sure how a Coca Cola or Snickers bar would cost and that they would still be popular. To the extent that you can accurately predict business success a few years ahead this can be the  most reliable criteria for picking investments.

Most Reliable Criteria for Picking Investments: Technical Analysis

Technical analysis uses price patterns to predict the future rise or fall of investments in the stock market. Followers of this approach say that all available information in the stock market is immediately priced into a stock. But, there are price patterns that are repetitive. And, if one can accurately recognize the first part of the pattern, they can profit as the rest of the pattern evolves. This approach is used in day trading but can also be effective in swing trading a short term investment.

Short term investment in stocks can be extremely profitable. It can be more profitable, over the years, than long term investing. This is because the rate of return on long term stock investment is typically not linear. Market volatility, market trends, and market reversal all affect stock prices, even of the most stable of stocks.

This approach requires that the investor pay closer attention to a given stock than with long term value investing. The point is to identify when price bumps will occur and invest just before. Then, the usual course of action is to sell the stock and look for another opportunity. This can be a very profitable way to invest but even pros like Buffett say that they really cannot time the market.

Most Reliable Criteria for Picking Investments: Throwing Darts

Years ago a group for business reporters taped the stock pages of the Wall Street Journal to the wall and threw darts at it. The stocks that were “picked” using this method were noted. Then the reporters kept track of those stocks, assuming that they had purchased an equal dollar amount of each, commissions and all. Then, over the months and years they tallied the results. It turned out that their “stock picks” outperformed the S&P 500, the vast majority of money managers, and virtually every mutual fund.

Later, one of the reporters wrote the book A Random Walk Down Wall Street. There were several lessons from the dart throwing and stock buying exercise.

  • All stocks are fairly priced given available information
  • By purchasing a large number of stocks an investor can average out the high and low performers
  • You need 10 blue chip stocks to average out
  • And, you need 40 mini-cap stocks to accomplish the same purpose
  • Either way, an investor who followed this approach had about a 12% per year appreciation of their investment portfolio

This approach incorporates cost averaging in which an investor invests an equal amount every month, quarter, or year. And, this system balances out companies that go bankrupt with those that experience spectacular growth.


What Are Today’s Foreign Investment Opportunities?

The clock is ticking down to trade wars between the USA and China, the USA and the European Union, and the USA and both Mexico and Canada. We just wrote about which offshore investments are risky. But, what are today’s foreign investment opportunities? We wrote about foreign direct investment as a guide to where opportunities lie within and outside of the USA. That was in 2014. The same year we noted that offshore investment timing is important as well. That would certainly seem to be the case today with the risk of a global recession due to a trade war and then a possible reordering of trade relationships across the globe. But, what are today’s foreign investment opportunities and are some of them right under our collective noses?

Direct Foreign Investment in Canada Is Up

The Canadians for Tax Fairness website reports that direct foreign investment in Canada is up, while direct foreign investment in the USA is down. They look at this in regard to the Trump tax cuts which have not been sufficient to bring foreign capital into the USA.

“There was speculation that this would result in a flow of money from Canada to the US and anecdotes of businesses relocating have been popping up in the news,” says Diana Gibson, a researcher with Canadians for Tax Fairness, “however, recent Statistics Canada data shows that the outflow has not happened.”

According to Statistics Canada data, Canadian direct investment in the US in the first quarter of 2018 was less than half of the long-term average at $4.1 billion, while direct investment from the US to Canada was higher than the long-term average, at $7.9 billion. Not only were flows into Canada higher than average, and flows to the US lower than average, but net investment actually flowed north.

The tax fairness folks use this data to argue that Canada does not need lower corporate taxes. Our take on the situation is that the USA is on the way to walling itself off from the rest of the world. And even investors in the USA are smart enough to see that today’s foreign investment opportunities are in places like Canada.

The folks who produce yearly foreign direct investment statistics are the OECD. They note that foreign direct investment is generally down across the globe.

Global FDI flows reached their lowest level since 2013 (USD 280 billion) in the fourth quarter of 2017. Inflows to the OECD area decreased by 37%, largely driven by decreases in the United Kingdom and the United States from high levels in 2016. Outflows from the OECD area decreased by a more modest 4%.

US News lists the countries that receive the most foreign direct investment and we believe are today’s foreign investment opportunities. The USA stills ranks number one but the figures were gathered before a trade war loomed. Next on the list are the UK, China, the Netherlands, Ireland, Brazil, and Singapore. Rounding out the list are Germany, India, and France.

If you are looking for investment opportunities outside of the USA, take a look at our article on risky offshore investments and then take a look at the US News article for ideas about better nations into which you might put your money offshore.


Which Offshore Investments are Risky?

As the US stock market cools off, many investors may be looking outside of America for investment opportunities. When doing so, it is a good idea to consider which offshore investments hold promise and which offshore investments are risky. Last year we asked, why aren’t you investing offshore?

The best deals in stocks today are not in the USA but in foreign markets. Why aren’t you investing offshore?

The United Nations World Investment Report for 2016 shows which countries investment money is flowing into and in what amounts. In 2015 money flowing into Asia and Europe each exceeded that flowing into North America.

In the years immediately after the 2008 market crash and onset of the Great Recession foreign direct investment came into the USA.

The largest gain in foreign direct investment on our chart is in the USA followed closely by Japan (113 billion to 100 billion. As a percentage increase Japan out performs everyone with an increase of more than 400%. Other significant performers are South Korea with a more than 200% increase in foreign direct investment and Hong Kong with a twenty-five percent increase. It is significant that the BRICS nations which were thought to be ready to move up economically lost as a group.

Smart money follows opportunity and flees from excessive risk. Which gets back to our initial question, which offshore investments are risky today?

Which Offshore Investments Are Risky: A list of countries to avoid

Market Watch looks at the issue of which offshore investments are risky and lists 7 market traps to avoid.

The countries where they see excessive investment risk are these.

  • Argentina
  • Brazil
  • China
  • Philippines
  • Poland
  • South Africa
  • Turkey

Here are snapshots of what they say about each offshore “investment trap” on their list.

Argentina

Argentina has been on the blacklist for some investors for a while, given its history of sovereign debt problems. And it’s looking grim on that front once again.
The current challenges, including debt tensions and rising inflation, are quite

Argentina has been an economic basket case for years. The country will need to carry out serious and permanent economic reforms to make it a non-risky place to put your money.

Brazil

Brazil was a bright shining star of the BRICS nations. Then China cut back of commodity imports and Brazil tanked.

Corruption, labor problems, and inflation are all issues that make investment in Brazil risky.

China

ETF’s that track the Chinese markets are all off this year.

The common claim is that it’s simply the fallout of trade-war posturing. But remember, there have long been structural challenges to China investments that include massive debts in both the private and public sector. In fact, a leaked report from a government-backed think tank warned of a “financial panic” that could be caused by cascading defaults and a liquidity crisis.

We have been concerned about Chinese capital flight for a couple of years. And perhaps the most dangerous issue for China is its huge debt burden. China needs to do what Taiwan, Japan, and South Korea did years ago. They need to transition from an economy heavily managed the state to one driven by the market. These are the issues that make offshore investments risky in China.

Philippines

While the Philippines has been one of the fastest-growing economies in Asia, with annual GDP growth rates just shy of 7% for the last few years, it now faces the very real challenge of runaway inflation thanks to that brisk growth rate.

Then add in the uncertainties caused by the country’s dictatorial president and you have good reasons to avoid investments in the Philippines.

Poland

Poland is considered a bright spot among the nations formerly in the Communist Block. But there are problems.

Unfortunately, Poland’s growth has been built largely on consumption fueled by government entitlements, which is something many investors think is unsustainable despite the impressive headline numbers.

If you have made money in an ETF tied to this economy it may be time to take little of that profit off the table.

South Africa

What was once Africa’s strongest economy has, like Brazil, seen the effects of lower commodity sales.

As growth and optimism has evaporated, so has lending. And worse, at the end of 2017 S&P downgraded South Africa’s debt to junk status as the economic outlook appeared increasingly grim.

South Africa is another risky country for offshore investments.

Turkey

ETFs that track investments in Turkey are down 30% this year. The county just re-elected a dictatorial president who due a constitutional change will have more power than ever. Inflation is on the rise and interest rates are up. This is an unstable situation and a risky country for investment.

Will Boeing Have to Outsource Production to Remain Profitable?

The evolving trade war between the USA under Trump and everyone else is having unexpected consequences. We just wrote about Harley Davidson moving production out of the USA. No matter that Harley is an American icon. It is not a huge company. How about the leaders of American industry that are also the biggest US exporters? The question we are going to consider is this. Will Boeing have to outsource production to remain profitable? A good article on CNN looks at the top US exports.

Yes, the nation’s businesses and consumers spent $566 billion more on imported goods and services in 2017 than the United States sold in exports. But American companies still sold $2.3 trillion in goods and services to foreign businesses and consumers.

The top US exporters are these according to the CNN article.

Food, beverage and feed: $133 billion. Soybeans were the number one product in this category, with sales of $22 billion, followed by meat and poultry at $18 billion.
Crude oil, fuel and other petroleum products: $109 billion. This is one of the fastest growing areas of US exports, up 37% in just the last year.
Civilian aircraft and aircraft engines: $99 billion. This is what makes Boeing (BA) the nation’s largest single exporter.
Auto parts, engines and car tires: $86 billion. Many of these are shipped to assembly plants owned by both US and foreign automakers in Mexico and Canada.

A single company, Boeing, constitutes the vast majority of aircraft and engines exported by the USA. It is in third place behind all of US agricultural products and all of the gas and oil exporting business when measured by export dollars. What happens if Boeing gets caught up in Trump’s trade war? Will Boeing have to outsource production to remain profitable?

How Does Boeing Make Money?

Boeing makes money in defense and space systems. But, two thirds of its revenue comes from commercial airplanes. And a substantial portion of its commercial airplane business relies of foreign sales.

Will Boeing Have to Outsource Production to Remain Profitable?

Boeing is already building a plant in China. Forbes noted this in a 2015 article, Boeing To Build Its First Offshore Plane Factory in China.

Facing severe pressure from state-subsidized foreign competitors and the end of federal export financing, Boeing has decided to throw in the towel.  After a hundred years of producing its commercial aircraft exclusively in the U.S., the nation’s largest exporter will build its first offshore aircraft plant in China.

This facility will primarily be used to finish off interiors of commercial jets. Boeing maintains its position at the top of the commercial airline business because it guards its technical secretes, especially in the business of producing jets. Thus it does not want to ship valuable technological expertise to other countries. But, if the choice is to lose perhaps a third of their business, Boeing may have to outsource production of more high tech parts in order to remain profitable. This may be the price Boeing has to pay to avoid being chewed up in Trump’s trade war.

Will Boeing Have to Outsource Production to Remain Profitable? PPT

Why Is Harley Davidson Moving Production Out of the USA?

Who would have thought? Harley Davidson, an American icon, is going to build motorcycles outside of America! Why is Harley Davidson moving production facilities out of the USA? As the Trump trade war between the USA and everyone else ramps up Harley Davidson is looking at Europe where they sell about 40,000 bikes a year. This is second only to their sales in the USA. Harley would be an obvious target for tariffs by the EU. It is an iconic American brand and it started in a state, Wisconsin, that voted for Donald Trump. Harley Davidson is looking to remain competitive in Europe. But, how big of a change is this for the company?

Harley Davidson Production Facilities

The company was founded in Milwaukee, Wisconsin in 1903 and its corporate offices remain on the original manufacturing site. But Harley Davidson has many manufacturing facilities according to the Harley Davidson Website.

  • USA, Missouri, Kansas City – Vehicle and Powertrain Operations.
  • USA, Pennsylvania, York – Vehicle Operations.
  • USA, Wisconsin, Menomonee Falls – Powertrain Operations.
  • USA, Wisconsin, Tomahawk – Tomahawk Operations
  • Australia, Adelaide – New Castalloy
  • Brazil, Manaus –Harley-Davidson do Brasil Ltda Assembly Plant
  • India, Bawal – Harley-Davidson India Bawal Assembly Plant
  • Thailand, Rayong – Thailand Sales Office and Assembly Plant

How Does a Trade War Hurt Harley Davidson?

An interesting article in the Manchester Guardian writes that the trade war is a threat to Harley Davidson.

Harley-Davidson is not having a great year. In January, the legendary bike company, struggling to reverse a four-year slide in sales, had to close its Kansas City factory. Now Donald Trump – who seems as if he’d like to be a Harley man – has added to its woes.

This week’s announcement of steel tariffs on US imports could add $30m to the company’s costs, according to Wedbush Securities, an investment firm. Worse still, European leaders are threatening retaliation, and several symbols of Americana – including Kentucky whiskey, Levi’s and Harley-Davidson motorcycles – are on their list.

The point is that steel and aluminum tariffs raise the cost to Harley of making a bike. Now they will be directly in the crosshairs of the Europeans who will slap tariffs on well-known American brands. And the company was already struggling to remain profitable. Why Harley Davidson is moving production out of the USA is to remain viable as a company. In May of 2014 Harley Davidson stock sold for $71 a share. Today it trades at $44.

What Is the Broader Picture?

Stocks are down across the board as the likelihood of a trade war increases. CNBC notes that the Dow falls 400 points as Trump announces plans to bar Chinese investment in US tech companies. The concern is Chinese retaliation.

Shares of chipmakers Intel, Micron Technology and Nvidia all fell at least 3 percent. Boeing, Caterpillar and General Motors – all companies with significant exposure to China – also fell by 2.2 percent, 2.1 percent and 0.8 percent, respectively. Boeing, Caterpillar and GM were also on track to post large monthly losses.

The pain has just begun to be felt.

Why Is Harley Davidson Moving Production Out of the USA? PPT

How to Invest without Losing Any Money

No investment is a sure thing, guaranteed to succeed and never lose money. But, there are ways to improve your chances of success and reduce your risk of loss. In this article we look at how to invest without losing any money.

How to Invest without Losing Any Money

  • Bank deposits with Federal Deposit Insurance
  • US Treasury Bills, Notes, and Bonds
  • Investment Grade AAA and AA Bonds
  • Long term value investing, intrinsic value

How to Invest without Losing Any Money: Federal Deposit Insurance

The ultimate in investment safety is a bank deposit insured by the FDIC (Federal Deposit Insurance Corporation).

The Federal Deposit Insurance Corporation (FDIC) preserves and promotes public confidence in the U.S. financial system by insuring deposits in banks and thrift institutions for at least $250,000; by identifying, monitoring and addressing risks to the deposit insurance funds; and by limiting the effect on the economy and the financial system when a bank or thrift institution fails.

An independent agency of the federal government, the FDIC was created in 1933 in response to the thousands of bank failures that occurred in the 1920s and early 1930s. Since the start of FDIC insurance on January 1, 1934, no depositor has lost a single cent of insured funds as a result of a failure.

In a period of low interest rates, such as now, bank deposits do not look all that attractive. However, within the $250,000 limit, per depositor, per bank, per account ownership category, this is how to invest without losing any money.

How to Invest without Losing Any Money: US Treasury Bills, Notes, and Bonds

US Treasury bills have maturities of a year or less. US Treasury notes have maturities from two to ten years. And, US Treasury bonds have maturities of ten to 30 years. Each of these investment vehicles is backed by the “full faith and credit” of the US government. The risk of loss of any of these if held to maturity is nil.

How to invest without losing any money in US Treasuries is to hold them to maturity or only sell them at a profit. Investors lose money in treasuries if they buy when interest rates are low and sell when rates are high. If you buy treasuries when rates are really high you have the choice of holding to maturity and enjoying the return on investment or selling for a short term profit.

How to Invest without Losing Any Money: Investment Grade AAA and AA Bonds

Moody’s Investors Service, Standard & Poor’s, and Fitch Ratings are credit rating agencies. Their ratings on bonds are a good guide to how safe an investment is. How to invest without losing any money in non-government bonds is to limit your purchases to investment grade AAA and AA bonds. In each case these are bonds issued by companies with exceptionally good finances and negligible risk of default.

The only two US companies with AAA bond ratings today are Johnson & Johnson and Microsoft.

How to Invest without Losing Any Money: Long Term Investing and Intrinsic Value

There is a drawback to very secure investments like bank deposits, treasuries, and high grade bonds. They do not produce a very high rate of return. When you think about this fact, remember what Warren Buffett said about rules one and two of investing. Rule number one is never to lose money and rule two is to never forget rule number one!
Having said that, how can you get a better return on investment and still have a low risk of loss? An approach that has worked well for many investors is first to learn how to assess the intrinsic value of an investment. The second part of this approach is to invest for the long term.

Intrinsic Value

Years back we wrote about intrinsic value analysis for stocks.

Successful long term investors consider the intrinsic value of stock before buying and when deciding to sell. This approach to stock investing goes back to the black days following the 1929 stock market crash which ushered in the Great Depression. Benjamin Graham taught investors that they did not need to play the market as though they were picking numbers on the roulette wheel. Rather he taught investors to do fundamental analysis of stocks in search of forward looking earnings. At the same time investors learned to consider what features of a stock provided a safety net in times of trouble. This was the margin of safety that some stocks have in the form of money in the bank, unencumbered property, or products that are unassailable in their market niche.

Read the article for the details, but the idea is that you should have a clear idea of how a company makes its money. And you should be assured that their business model will continue to generate profits for the long term.

Then the issue is how long to invest to increase the likelihood of profits and to reduce the risk of loss. The point of long term investing is that you do not need to time the market. Rather, you invest money every month, quarter, or year in investments likely to grow over time. Just last year we asked a question. How many years are required to make an investment long term?

The long term for investing is longer than you might think. You need to stay in the market for longer than 5 years and perhaps even longer than 10 years to reliably see the benefits of long term investing.

The other part of how to invest without losing any money was noted in that same article. You need to pay attention to your portfolio. And you need to recognize when a company’s business model no longer makes any sense. In our article we noted that Kodak had a great business plan until digital photography came along and then their plan did not work.

How to Invest without Losing Any Money PPT

How to Choose an Investment Advisor

It is one thing to invest your first $10,000 and another to successfully invest and manage more substantial amounts of money. First of all, when you first start out investing it is often more important to get you financial house in order than pick the right stocks! But, now what do you do with an inheritance of a quarter of a million or more. Or what if you have sold a successful business for tens of millions of dollars? At this point you are thinking that you need some sound advice about how to invest your money. This brings us to how to choose an investment advisor.

How to Choose an Investment Advisor: What Do You Really Need?

Families with huge fortunes are concerned about preserving their wealth from one generation to another. There are various financial strategies to help avoid losing money to estate taxes with each generation. But regarding year by year investments, the point is to first stay ahead of the corrosive effects of inflation and then generate a predictable yearly return.

Above all the goal is to avoid losing everything that great grandpa built and passed on! And a big part of any long term strategy is to avoid having the cost of managing your funds eat away at your return on investment!

How to choose an investment advisor starts with deciding, in general terms, what you need. Are you are happy with an absolutely guaranteed return year after year? If that is the case you may simply want to buy US Treasuries and then ladders of CD’s at several banks. If that sort of absolute security is your goal you do not need to pay someone a fee to manage your money!

How to Choose an Investment Advisor: Brokers, Mutual Funds and Fiduciary Responsibility

In medium.com Richard Reis offers advice about this issue and says to be skeptical of financial advisors.

There are over 200 (!!) designations for financial advisors (e.g.: “wealth managers”, “investment consultants”, “financial consultants”, etc.)

According to Tricia O. Rothschild (Morningstar’s CPO), there are something like 310,000 financial advisors in the U.S. now!

He makes the point that if you are going to hand over control of your investments to someone you need to trust them. He uses the Bernie Madoff pyramid scam as an example.

But, avoiding a crook is not the only issue. Fees and commissions can kill you. Mr. Reis notes that Mutual Funds commonly do not beat the market even before they charge you money to manage your funds. The big issue with investment advisors is that all too often they are stock brokers in disguise. They take your funds and charge a small fee. Then they churn your account. This means they repeatedly trade stocks. And every transaction makes money for them and reduces your account.

How to Choose an Investment Advisor: Put Your Money in an ETF and Don’t Pay for Advice

The sad fact is that many money managers fail to beat the S&P 500 year after year. How to choose an investment advisor for many is get some onetime advice and then invest on your own. A viable approach to investing large sums money and not having the fees kill you is to invest in exchange traded funds.

Excellent reasons to use exchange traded funds include low expense ratios, tax efficiency, automatic diversification, and ease of entry and exit equal to stock investing. Investors may choose investing with exchange traded funds and avoid mutual funds. ETFs often outperform mutual funds and they are cheaper to enter and leave. Additionally, investors can pick ETFs that track various sectors instead of the broader market or international indexes specific to countries or regions.

Interestingly, Warren Buffett often suggests exchange traded funds as an investment choice for long term investors.

If you do choose an investment advisor ask for references, demand to see long term positive results, and demand to see each and every fee and commission.

How to Choose an Investment Advisor PPT

Should You Use Earnings or Growth as a Guide When Picking Investments?

Growth stocks are popular because, you guessed it; they grow and become more valuable. Investors ignore their high price to earnings ratios (P/E ratio) and just keep buying. But how about using earnings and other factors as a guide? The question is, should you use earnings or growth as a guide when picking investments?

Should You Use Earnings or Growth as a Guide When Picking Investments: Overpriced growth stocks

The Toronto Globe and Mail has an interesting article about this subject. They point out a long term problem with growth stocks.

There is plenty and unequivocal evidence from academic research in Canada and around the world that, on average, value stocks (defined as stocks with low price-to-earnings or price-to-book ratios) beat growth stocks (those with a high P/E or P/B). For example, in recent research I carried out using U.S. data, I found that, on average, value stocks beat growth stocks by about 6 per cent over the 1982-2013 period.

The problem with popular growth stocks is that they become too popular and their prices get bid up beyond what fundamentals would support. We repeatedly suggest the use of intrinsic stock value as a guide to investing. In our article we pointed out that understanding how a company earns money and will continue to do so is basic to using intrinsic value as a guide to investing.

The ability to see into the future to see how well a company will manage its assets, products, costs, R&D, and marketing is of utmost importance in calculating intrinsic stock value as a means of deciding whether or not to purchase a stock.

The often repeated quote from Warren Buffett is useful in this case. He has tended to avoid tech stocks and focus on consumer stocks with strong brand names. This is because he does not know what a given tech stock will be worth or if it will even have a market in five years. But he has a pretty good idea that a product like Coca Cola or Snickers will be selling for five and ten years hence.

Should You Use Earnings or Growth as a Guide When Picking Investments: Underpriced value stocks

When investors look at the market they see certain stocks going up in price and other stocks languishing on the sidelines. There is a natural tendency to buy the stocks that are going up in price and ignore those that are on a flat price line. The fact of the matter is that when lots of investors pick growth over value they distort the market. Smart long term investors use this fact to pick up bargains for the long term.

Should You Use Earnings or Growth as a Guide When Picking Investments: Short Term Investing

The place for the majority of growth stocks is with short term investment. Good examples would be Microsoft from its IPO until just before the dot com bubble burst or at the depths of the Great Recession until now.

Should You Use Earnings or Growth as a Guide When Picking Investments? PPT

Three Safe Ways to Start Investing with Small Amounts of Money

You are not an investor yet but you would like to start. You are probably young and do not have a lot of money. But you are watching the stock market go up and up and would like to stake your claim to part of the American dream. How do you start out investing and how do you avoid losing your money right away? We suggest three safe ways to start investing with small amounts of money. You do not necessarily need to start out investing in the stock market! However, that is where you probably want to put your money eventually and for the long term.

Three Safe Ways to Start Investing with Small Amounts of Money

  • Money market accounts and certificates of deposit at the bank
  • Pay off your credit cards
  • Buy your home instead of renting

From these three safe ways to start investing with small amounts of money you can build an investment portfolio over the years.

Money in the Bank

The first of our three safe ways to start investing with small amounts of money is to stay safe and liquid. The first step in investing in the stock market is not to buy stocks.

The first step is to take a look at your finances and your expenses. In fact how to start investing in stocks is to get your financial house in order first and then start picking stocks.

If you want to be a successful investor, discipline yourself. Put $50, $100 or whatever you can in the bank every payday. As your bank account grows create a ladder of certificates of deposit. These will pay better interest than your savings account and if you set them up so that every month or so one of them comes due you will always have some cash on hand for emergencies.

Stop Paying Credit Card Interest!

The interest rate on the outstanding balance on your credit cards can be as low as 13% and as high as 22%. If you are a really successful investor you will still have trouble making 13% a year on your portfolio year in and year out. And certainly you will find it difficult to make 22%. So when you start investing with small amounts of money pay off your credit cards first and foremost.

Your Home Is Still Your Best Investment

A major cost of investing in a business is interest paid on money that your borrow. The great part about buying a home is that the mortgage interest is tax deductible. Bank Rate has a tax deduction calculator that will show you how much you can save each year via state and federal mortgage interest deductions. For a $200,000 mortgage you can save around $1,700 the first year alone. Commonly you will pay less for your mortgage for the same size home than you would pay to rent. And then it gets better because the mortgage interest is deductible. The last of our three safe ways to start investing with small amounts of money is to buy your home instead of renting.

And What Is the Next Step?

The US stock market is the best bet for long term profits. While you are putting money in the bank, paying off credit cards, and buying a home instead of renting, start learning about common stocks, ETFs and other ways to invest in the stock market.

Three Safe Ways to Start Investing with Small Amounts of Money PPT


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