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Solid Investments for Retirement

As investors approach their retirement years it is important to modify their investment portfolio. Risky growth stocks may provide impressive earnings for a younger investor. But a retiree cannot bear the risk of losing part of their portfolio just when they need it the most. Solid investments for retirement should always include dividend stocks but more importantly stocks with long term intrinsic value. Here are a few thoughts on the subject.

Investments for Income in Retirement

A substantial part of any investment portfolio in retirement is typically in dividend stocks. While a person may have reinvested dividends over the years, they will typically take the dividends during retirement. Well-chosen companies with dividend stocks have been paying dividends for decades and steadily increasing the dividends as well. The ability to keep doing this is a measure of the financial health of such an investment.

Healthy dividend-paying companies are not growing rapidly but are generating healthy profits. Passing these on to the stockholder is a way of making up for slowed growth. Some of the highest and most reliable dividends come from utilities which have slow growth, are stable and are financially solvent.

Companies that have been paying dividends for more than a century include the likes of Coca Cola, Exxon Mobile, Procter & Gamble, Colgate Palmolive, and Eli Lilly and Company.

Solid Investments for Retirement

Although dividend stocks are a mainstay of a retirement portfolio, they are not the only stocks you should have. The Motley Fool suggests buying these 3 stocks if you are retired.

While there are thousands of stocks available on the market, not all of them are well suited to help you preserve your retirement savings. But there are also some stocks that are great picks for retirees. If you’re retired, three stocks you should consider buying are Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL), Brookfield Infrastructure Partners (NYSE:BIP), and Welltower (NYSE:WELL).

These are solid investments for retirement and their reasoning in choosing these three is sound.

Alphabet, Brookfield Infrastructure Partners, and Welltower are very different companies that operate in very different industries. But all three stocks share a common denominator that retirees should look for in any stock that they buy. That common denominator is a strong business model that is built for the long term.

Thus these stocks have long-term intrinsic value and will provide income and growth during retirement. As they point out in the article, Alphabet does not pay dividends but the core company (Google) is a cash cow and the various offshoots that Alphabet is working on such as self-driving cars and artificial intelligence are likely to be winners down the line.

 

Solid investment for retirement include Alphabet, the parent company of Google.

Alphabet (Google) Logo

 

Brookfield Infrastructure Partners owns infrastructure assets in the USA and around the world. They are solvent with a sound business plan and pay a healthy dividend of 5%. For the pros and cons of infrastructure investing read our article.

Welltower is a real estate investment trust (REIT) that stands to benefit from the demographic trend of more seniors with greater health care needs. Investopedia explains requirements for REITs.

  • Invest at least 75% of its total assets in real estate, cash or U.S. Treasuries
  • Receive at least 75% of its gross income from rents from real property, interest on mortgages financing real property or from sales of real estate
  • Pay a minimum of 90% percent of its taxable income in the form of shareholder dividends each year
  • Be an entity that is taxable as a corporation
  • Be managed by a board of directors or trustees
  • Have a minimum of 100 shareholders after its first year of existence
  • Have no more than 50% of its shares held by five or fewer individuals during the last half of the taxable year

Equity REITs buy and own income producing properties and make money through management fees and rents. Mortgage REITs provide financing for property owners and operators and their income is derived from the interest rate spread between their cost of funding and interest rates paid for the properties. And, there are hybrid REITs the do both.

Because REIT rules require a diverse ownership, investors are protected from the actions of a handful of investors who might not have everyone else’s interests at heart!

Diversification is Wise

As much as you may be impressed by Alphabet, Coca Cola, Procter & Gamble, or any other investment for retirement, it is not wise to limit your retirement portfolio to one stock. On the other hand, it is also not wise to have a hundred stocks in your portfolio. Smart investors go into retirement with enough stocks to be diversified and a small enough number that they can easily carry out periodic fundamental analysis. You may not change anything in your investment portfolio for years and years but it is wise to make sure that your portfolio does not contain a General Electric which everyone loves but does not grow, or an Eastman Kodak whose business model has become extinct!

Solid investments for retirement include AAA bonds from the likes of Microsoft or Johnson & Johnson

AAA Bond Rating

It is also wise not to limit your retirement portfolio to one asset class. Typically, retirees will hold part of their assets as stocks, part as bonds, part to be actively managed, and part in an ETF or two with passive management. Our article about how to invest without losing any money is a good resource for part of your retirement portfolio. US Treasuries, AA bonds, or AAA bonds can be laddered in such a way that a retiree can have more cash available for necessities and not just have to rely on dividends and interest payments.

Is any Risk Allowed in a Well-Designed Retirement Portfolio?

Pure speculation with your retirement savings is frankly dumb! But, if you have expertise in a given area and can spot investments with a strong potential, it would be a waste talent not to put a small percentage of your retirement portfolio to work on the potential for dramatic growth. In the end, solid investments for retirement are those with a good business plan and strong intrinsic value. If you can spot that in a small startup, it probably belongs in your portfolio.


How Do You Choose the Right Time to Buy an Investment?

Stocks seem to be recovering from the end-of-2018 correction. Is this the start of a new upward trend or are we still in for continued volatility? When you believe that a stock, real estate investment opportunity, or any investment is about to go up in value, how do you choose the right time to buy an investment? Although there are a few seasonal predictors of stock prices, choosing the right time to buy or sell typically has to do with intrinsic value versus current market price. Now that stocks are recovering a bit, what are the factors to watch for?

How Do You Choose the Right Time to Buy an Investment? Wait for a recovery like this.

S&P 500 end of 2018 to January 2019

 

How Do You Choose the Right Time to Buy an Investment?

The best long term predictor of increasing stock value is a good business plan that generates increasing earnings year after year. Earnings are what drove stock prices higher in the years since the 2008-9 market crash and subsequent financial crisis. And decreased earnings are what hurt stocks like the FANG tech darlings in the later part of 2018.

Thus, the prospect of increased earnings makes an investment attractive. Investor’s Business Daily thinks this is currently the case for the FANG stocks.

Despite a sharp drop in the four FANG stocks last year, the outlook for the year ahead looks strong, with Amazon in the best position, said a Wall Street analyst Tuesday.
Canaccord Genuity analyst Michael Graham also maintained a buy rating on the FANG stocks – Facebook (FB), Amazon (AMZN), Netflix (NFLX) and Google-owner Alphabet (GOOGL).

The analyst is most excited about Amazon.com earnings prospects and expects the stock to go up by a third in the coming year. His opinion of Facebook is that recent losses have made it easier to post impressive gains next year. He predicts a twenty percent price jump in 2019. Netflix has raised US prices and the analyst expect a fifteen percent increase by the end of 2019. And, he is also positive on Google, expecting a ten percent increase in the coming year.

You should do your own fundamental analysis before buying back into these stocks but, if your analysis matches his, this is the right time to buy into these investments.

How Long Do You Expect to Hold the Investment?

If we look at the 2008-9 stock market crash and going forward we see a spectacular rise in the S&P 500 from a low of 770 to 2618 today. Ideally, an investor with the value of spectacular hindsight would have cashed out at 1561 when the market peaked on October 12, 2007. But this has more to do with when to sell an investment. Either way the S&P 500 as nearly doubled or nearly tripled in value since that time. We cannot go back in time to change our investments of a decade ago. But, we can learn from experience and come to appreciate how in long term investing the hills and valleys are averaged out and simply by investing in stocks with strong intrinsic value, we can expect to win over the years.

 

How Do You Choose the Right Time to Buy an Investment? If you hold the right stock for a long time you will profit no matter when you buy it.

S&P 500 All Through January 2019

So, whether you are still in the market now, or sitting on cash after having sold in October of 2018, how do you choose the right to buy an investment now? The point of this exercise is that if you believe that Amazon.com or any company will continue to generate profits over the years, it is time to buy. Ideally, this is after a downturn when the price is a bit more attractive. If you are going to hold onto this stock for a long, long time, the precise time you buy it will be less important.

Dollar Cost Averaging

Many investors take money out of their salary for investing on a routine basis. A reasonable approach is to simply invest when the money is available. This approach guarantees that you won’t spend it before you choose the right time to buy an investment. The approach is called dollar cost averaging and is described by Investopedia.

Dollar-cost averaging (DCA) is an investment technique which involves buying a fixed dollar amount of a particular investment on a regular schedule, regardless of the share price. As a result of the approach, the investor ends up purchasing more shares when prices are low and fewer shares when prices are high.

The first advantage of this approach is that it removes fear and greed from investing. Thus you will be less inclined to buy excessive amount of stock at high prices and will naturally buy increased amounts of stock when prices are attractive. This approach may not be as profitable as excellent market timing but, the vast majority of retail investors are not really good at market timing so this approach is a huge plus.

Storm Clouds on the Investing Horizon

Over the long term well chosen-stocks using an intrinsic value approach are one of the most effective vehicles for building wealth. But, there are times when external events can greatly change the ability of a company to make money from its business plan. For example, when China cut off soybean imports as a move in the trade war, investments in agriculture, soybean farmers, grain elevator operators, and shippers were in trouble or in danger of going out of business. When the trade war threatens to become permanent, companies from Boeing to Harley Davidson lose substantial parts of their business.

There is always static in the markets as prices are bid up and down. And, there is commonly a melodramatic quality to analysts bidding for your attention and offering hope of obscene profits or threats of devastating losses. Most of this can be ignored over the long term. But, there are factors that change the face of investing such as world wars, basic changes in the world of technology, or shifts in social and political opinion. A current example is this. Who could have predicted the mess that the Brexit has become? But, now that it is unfolding, very badly, investments in British stocks may be bad choices for years and years to come. Kodak was solid gold until digital cameras arrived. And, if someone does not get control of the mad man in North Korea, all bets might be off.

The only way to deal with choosing the right time to buy an investment when such uncertainties exist is to diversify sufficiently that a single bad event does not destroy your investment portfolio.


When Should You Sell an Investment?

The stock market had a tough time of it at the end of 2018. Despite a partial recovery the tech darlings that led market gains for years have investors worried. If you have ridden the bull market for gains over the last few years, is it time to consider some changes in your investment portfolio? For most investors, the question is whether the market will come back or not this year. But there are a number of reasons to consider getting out. So, when should you sell an investment? Here are some thoughts on the subject.

When Should You Sell an Investment?

The first question really is why did you invest in the first place? Yes, we invest to have more money. But, is there a specific reason besides simply wanting to have more? Please forgive us for stating the obvious, but here are ten reasons why we invest.

  • Increase your wealth
  • Saving for retirement
  • Reach a financial goal
  • Take advantage of employer matching 401(k) program
  • Increase returns from pre-tax dollars
  • Increase the rate of return on your money
  • Start your own business
  • Take care of family or contribute to a charity
  • Reduce your taxable income
  • Invest in and be part of a new business venture

The point is that when you should sell an investment will depend in part on why, and how, you invested in the first place. Here are a few examples.

No Longer a Good Investment

We have written about Kodak several times. George Eastman and his company invented camera film and the personal camera. They were the leader in the industry for a hundred years. Then digital cameras were invented and Kodak’s business plan no longer worked. When should you sell an investment when its business plan is obsolete? The answer is, sell it now. Do not try to time the market. Get out because the direction of the investment will be downhill until the end.

There are situations in investing that are obvious, like Kodak and, perhaps today, Sears as well. Sears was a pillar of the retail world for about as long as Kodak dominated the world of cameras. And, although online shopping has greatly hurt department stores, there are still retailers making a profit. But, Sears is not one of them. When should you sell an investment that is not keeping up with its peers? Again, the answer is, sell it now.

Learning to assess intrinsic stock value is essential for a long term investor. If your goal in investing is to increase wealth over the long term, you need investments that will reliably generate income over the years. These investments have intrinsic value in excess of their current price. When that is not the case and is not likely to be the case, over the long term, it is time to sell.

When should you sell an investment? Sell when you will need money soon and the market looks like this!

VIX Last Six Months 2018

Market Too Volatile for Your Investment Time Frame

If you are investing with the goal of sending children to college or for the business you have always dreamed of, you may not have the luxury of waiting for each of your investments to ride out a recession and a down market. And, like most normal investors, you may not be all that successful at timing the market.

If the market starts getting volatile, like it did the last few months, when should you sell an investment? The answer is that you should sell at least part of your investment as soon as possible on the next up day in the market.

In fact, if you are nearing retirement, getting close to when you will need money for college, or close to what you need to start your new business, it will be wise to re-balance your portfolio to reduce risk from your most volatile investments. Part of such a portfolio should contain cash or its equivalents. We have written about how to invest without losing any money. In that article we note that the safest investments include US Treasuries but only if they are held to maturity. When the markets, interest rates, and other factors become volatile, use a ladder of short term bonds or treasuries to provide safe investments and ones that will not be swept up in the market volatility.

A Multipurpose Investment Portfolio

Even if you are putting away money to send the kids to college, you are, or should be, saving for retirement as well. Thus, when you should sell an investment will depend on the purpose for which you are investing each portion of your portfolio.

Additionally, money in your 401(k) at work or your IRA(s) should remain there until retirement or at least as long as you will not be penalized for early withdrawal.

The mix of investments in a portfolio is typically more growth stocks early in the game and more value stocks and bonds later on. This mix can be modified for each portfolio segment so that when it comes time to sell investments and get ready to use one portion of the portfolio, the other portions remain untouched.

When should you sell an investment like Coca Cola? Sell when you need cash for college, retirement, or a new business.

Coca Cola

When Should You Sell an Investment before You Expected to?

US News published an article about when it’s time to sell a stock.

Other than cash flow needs, “The only reason you would sell would be when the future expectations are below your target.”

Thus, you are routinely doing fundamental analysis on your portfolio and the fundamentals have changed on one or more of your investments. This should be a routine chore over the long term. Or, the time has come to cash out an investment to start paying college tuition. When should you sell an investment outside of this time frame? It is when you cannot make an intelligent assessment because of market volatility. It may be the trade war, interest rates, or social and economic unrest offshore where you have foreign direct investments. It does not matter why it happens but when you cannot make an informed decision it is time to get out. This advice follows that of Warren Buffett who says he throws out 95% of his potential investments as too hard to call. Buffett, in fact, held a strong cash position going into the dot com crash because he said the market made no sense!

When Should You Sell an Investment? PPT


Practical Gold Investments

December 2018 was a tough month for the stock market. In fact, the S&P 500 started falling in October of 2018. An aging bull market, a trade war that could be long term, higher interest rates, and falling profits are all indicators that the long run up in stock prices is over. When a bear market is on the horizon, one of the options for an investor is to take profits from stocks and look for some practical gold investments. The key here is the word “practical.” There are inefficient and difficult ways to invest in gold and then there are practical gold investments. Here are some thoughts on why and then how to invest in gold.

Why Invest in Gold?

A true “gold bug” believes that in the end all paper (fiat) currencies will become worthless and that gold will hold its value. These folks buy gold bullion with the intention of holding it forever. Others jump on the bandwagon when gold is going up in price, only to sell when the price of gold corrects. Why you would want to invest in gold can vary and depending on your reason there may be different practical gold investments for you.

Investopedia writes about 8 reasons to own gold. Here are their 8 reasons.

  1. Gold holds its purchasing power over the decades and centuries.
  2. When the dollar weakens gold bugs believe that process will continue and they buy gold.
  3. Gold is seen as a hedge against inflation.
  4. The purchasing power of gold also rises during periods of deflation such as the Great Depression.
  5. Gold is a refuge during periods of geopolitical crises.
  6. New gold supply is dependent on new mines dug deeper and deeper so there are supply concerns.
  7. Gold goes up when the stocks and the dollar go down so it is a way to hedge risk in stocks and cash positions.
  8. The combination of all the above factors makes gold a good (but limited) part of any investment portfolio.

Your reasons for buying gold will determine what to buy, how long to hold, and other factors. Thus practical gold investments for one investor will differ from the practical gold investments of another.

Practical Gold Investments

Gold Bullion

Let’s assume that you are a true “gold bug” and believe that the only thing that will hold its value over the decades and centuries is gold. You will probably want to buy gold bullion. Years ago we wrote about how to buy gold for investment. We wrote about buying gold bullion at that time. The issue with gold bullion is storing it in a secure place. If you periodically buy a few gold coins from the US mint, your bank safe deposit box will do just fine. If you are routinely buying 12.4 kilogram “Good Delivery” gold bars, you will quickly need more safety deposit boxes or will need to pay to have your gold stored in a secure vault. If you want to sell any of your gold you will need to have it removed from storage and shipped to the buyer. This is an extra cost.

And, while your gold is sitting there during a stock market rally, it is not appreciating in value or gaining interest. Gold bullion is an ultimate hedge against societal and economic collapse but is commonly not a good investment. We wrote that you might want to avoid gold as an investment back in 2012 when the price was peaking. In that article we noted the increase in gold prices in the 1970s and the fall of gold prices in the early 1980s. It might be noted that while the price of gold was $1,700 an ounce when we wrote that article, it is $1,290 today! Folks who sold their gold in 2012 and bought an S&P 500 index fund did just fine, thank you very much.

Flexible and Practical Gold Investments

The best time to buy gold is when nobody else wants the shiny stuff and the best time to sell is when the whole world cannot buy enough. Buying and selling gold, instead of buying and storing it, requires flexibility. You can get this with an ETF (exchange traded fund) that tracks the price of gold bullion. We wrote about Gold ETFs in our article How to Make Money in Gold Investments. The good parts of holding shares of a Gold ETF are that you are not paying to store your gold and buying or selling does not require you to take or give up physical possession. You can buy and sell your Gold ETF shares just like you would a common stock.

And, speaking of stocks, there are gold mining stocks as well. A gold mining company that is well run will make money whether the price of gold is high or low. The price of the stock will be lower when gold is low and higher when gold is high. But, the price effect is multiplied with gold mining stocks. When the price of gold starts to go up, the price of a well-chosen gold mining stock will go up faster. When the price of gold starts to fall, gold mining stocks lose value faster than gold itself.

Both gold ETFs and gold mining stocks can be bought and sold rather easily and do not require a secure storage like gold bullion. These facts make them practical gold investments over time from important to individual retail investors.

Hedging Investment Risk with Gold

Many investment advisers recommend that gold be a small portion of any well-balance investment portfolio. If you choose to follow their advice, there are practical gold investments and impractical ones. You can as easily hedge risk in your portfolio with a gold mining stock or gold ETF as with gold bullion. And there is a lot less fuss and bother when you own shares instead of having gold bars costing you money for secure storage.

Practical Gold Investments PPT

Investment Risks for 2019

The stock market has been volatile and ended 2018 badly as the worst year in the last ten. Has the market gotten the jitters out of its system or is more trouble in store? What are the investment risks for 2019 and how can you prepare your investment portfolio?

Investment Risks for 2019

  • The trade war will continue and get worse.
  • Interest rates will rise excessively due to the Federal Reserve.
  • The global and U.S. economy will slow down.
  • As a result the stock market will continue to be volatile and experience losses.

Investment Risks for 2019 from the Trade War

The deficit that the USA runs with China and the world in general is not supportable. As such something needs to be done to staunch the monetary bleeding from the US treasury and pocketbooks. Likewise, the steady loss of US intellectual property and technical secrets cannot go on without the USA losing its dominant position in the world power structure.

Thus the USA should not give in easily in order to resolve trade negotiations with China. A few months ago we looked at what happens to your investments if the trade war becomes permanent. As we noted in that article, China wants to move to a more dominant and secure position on the world stage. They have bitter memories of having been forced “inward” during the period of European colonial expansion. And, the Chinese Communist Party intends to stay in power, for which they will need to maintain economic growth and social stability.

The key to this situation is that neither side wants to give way. As such the trade war may be protracted and economically damaging. This is one of the distinct investment risks for 2019 and beyond. A slower global economy with effects on both China and the USA could damage investment prospects across the board.

Investment Risks for 2019 from a Too-aggressive Federal Reserve

When the markets tanked in 2008 and 2009 the USA and the world were on the brink of another Great Depression. Two of the measures that saved the day were instituted by the U.S. Federal Reserve. First of all they dropped interest rates to almost nothing. Second, they instituted quantitative easing in which the Fed purchased U.S. Treasuries and corporate bonds with their own funds. This was equivalent to printing money and served to inject funds back into the financial system to replace part of the $7 Trillion or so in value that was lost in the real estate and stock market crashes.

Back when we wrote the article there was concern about the Fed tapering off their quantitative easing campaign too quickly. They are, in fact, steadily reducing the size of their bond and treasury portfolio by letting the bonds expire. And, the Fed has been slowly but steadily bringing interest rates back up to more normal levels as justified by economic growth. The concern for 2019 is that the Fed will be too aggressive and with an extra rate increase or two cause a recession.

We recently looked at how higher interest rates will affect your investments. The affect will be three fold. First, the value of your bonds and treasuries will go down as rates go up. Second, you will gain a higher interest rate on bonds and treasuries in the future. Third, the steadily increasing cost of servicing the huge American debt will choke off investment, infrastructure improvements, and the US economy.

Investment Risks for 2019 from an Economic Slowdown

The driver of the stock market for the last decade has been continually impressive earnings. But, how can earnings continue to go up when people start saving their money instead of spending it. We just saw how the market reacted to Apple announcing that iPhone sales are slipping in China. Intrinsic stock value is dependent on forward-looking earnings. Whether it is Apple selling iPhones or the Chinese industrial complex churning out products for the world, the production of products needs to match the size of the market. And the ability of the market to pay for these products need to keep up. Otherwise, prices or production need to fall. This is why markets tend to have boom and bust cycles. Other factors like the trade war and interest rates aside, investment risks for 2019 include an aging bull market and economic boom in need of a reset.

Risks Associated with a Volatile and Falling Stock Market

There will be two risks this coming year associated with both volatility and a falling market. One is that if you don’t get out of investments soon enough you will lose a lot of money. The other is that if you get out of good long term value investments as the market falls and do not get back in, you will miss out on long term profits as the market recovers!

If you are worried about investment risks for 2019 look at long term trends instead of short term.

Three Stock Market Perspectives

Preparing Your Investments for the Storm in 2019

If you are a true long term value investor who looks only at the big picture, you may simply choose to ignore what you consider to be the static of a volatile and falling market in 2019. You will continue to use fundamental analysis in picking and tracking your investments. The only investments that you will sell will be those that do not promise profits over the long term and not necessarily those with weak prospects in the short term. Market jitters, interest rate concern, and the normal ebb and flow of markets are generally not a concern for a true long term investor. But, long term mega-trends are real and should be considered. This where the trade war is not just a short term issue. Rather it is a symptom of a global power struggle that will last a long, long time. To the extent that the USA and China, or the USA and Russia, can come to amicable terms, compete without working to wreck long term damage on the other, the current trade war and other such issues will be temporary. To the extent, that the major powers see this as an existential struggle for survival, it will redraw the economic, political, and military map of the world and that will not be good long term investing or prosperity.

When you consider investment risks for 2019 and beyond consider what products will still be selling in the decades to come.

Coca Cola

Investment Risks for 2019 PPT

How to Protect Your Investments from a Recession

The trade war shows signs of becoming long term and it is taking its first bite out of Chinese manufacturing. Many economists are predicting a global recession in the coming year and in this interconnected world the USA will not be immune. The question is how to protect your investments from a recession.

How to Protect Your Investments from a Recession

The first choice in protecting your investing capital is to convert to cash or cash equivalents such as we mentioned in our article about how to invest without losing any money. US bank accounts are protected by Federal Deposit Insurance and both US Treasuries and Grade AAA or AA corporate bonds are safe bets. You will have to do with a lower rate of return than in a surging stock market. But, considering that the market will fall during a recession, this is a good way to preserve investment capital until the market stabilizes.

If you are going to stay invested in the stock market you need to look carefully at the intrinsic stock value of each of your investments. For a long term investor committed to staying in the market, the concern is not if your stock falls by twenty percent in the coming year bur rather if it stays there instead of resuming its growth in the years that follow.

 

How to protect your investments from a recession is to hold companies like Coca Cola.

Coca Cola

 

Long Term Investment Trends and Concerns

The Western markets were spooked this morning after Asian markets fell due to reports of a significant Chinese manufacturing slowdown. Markets tend to ingest such info and jump up and down. The underlying concern is that China’s growth will, in fact slow down. The USA does not sell all that much to China so a Chinese recession on the face of it would not be a problem for the USA. But, China has a huge manufacturing sector that draws raw materials from all across the world. The slowdown of Chinese manufacturing will affect emerging markets in every corner of the world. That, in turn, will reduce demand of US products in these markets as there will be less money to spend and less credit to help with purchases.

China has had a spectacular rise over the last forty years or so. Its rise has been comparable to that of the USA after the US Civil War and into the 20th Century. Or, taking an Asian example or two, China’s rise has been comparable to that of Japan, Taiwan, or South Korea after the Second World War. All of these economies came to a point where they needed to liberalize central control to keep growing. It may not be possible for the Chinese Communist Party to do this and retain control. The downside for China is its huge and increasing debt and we only need to think of Japan around 1990 to realize how that might turn out.

Over the long term China will not be able to grow at the rate it had been and will not be able to keep taking on debt to fuel its expansion. As such, any investment linked to the China manufacturing miracle is likely to slow down or even reverse.

US Debt Burden

The Trump tax cuts provided a nice boost to the US economy. However, that stimulus is running out and in the end has simply added to the mounting US national debt. We recently asked how will higher interest rates affect your investments. Considering that the USA will likely need to pay higher interest rates over the long term to finance a mounting national debt, this is good question to consider.

The USA is in dire need to infrastructure investments which may or may not come to be. The backbone of US transportation is the composite of US railroads, highways, airports, bridges, waterways, and ports. If these are not kept up the US economy will suffer over the long term and any investments needing these facilities will suffer.

With an increasing amount of available money going to pay off the national debt there will be less available for investment in any and all business and financial endeavors.

What Investments Will Continue to Grow in a Prolonged Recession?

Investopedia writes about investment portfolio strategy in a recession.

Recessions are characterized by faltering confidence on the part of consumers and businesses, weakening employment, falling real incomes, and weakening sales and production-not exactly the environment that would lead to higher stock prices or a sunny outlook on stocks.

As they relate to the market, recessions tend to lead to heightened risk aversion on the part of investors and a subsequent flight to safety. On the bright side, however, recessions predictably give way to recoveries sooner or later.

We commonly suggest an assessment of intrinsic stock value for picking, holding, or selling stocks. This is especially true when recession looms. The best and safest companies to invest in during a recession are those that have weathered many before. Companies with decades in business, strong balance sheets, and a history of paying dividends year in and year out including during recessions are good picks. Low debt, products that sell in good times and bad, and healthy dividends are all how to protect your investments from a recession.

Years ago we wrote about investing in beer. It is true that in bad times we drink beer to drown our sorrows and in good times we lift a glass, or two, of beer to celebrate. Likewise, households use dish soap, shampoo, laundry soap, and other necessities in good times and bad. Pharmaceutical companies typically survive economic slumps and companies with highly diversified product lines like Johnson & Johnson will be around after the next recession has come and gone. And McDonalds will be selling hamburgers forever.

 

How to protect your investments from a recession is to consider companies like McDonalds that will be selling hamburgers forever.

McDonalds

 

Growth during a Recession

Not all companies need to hunker down and tighten their belts during a recession. There will always be companies in biotech or other tech areas that develop a new product or service and grow substantially while the rest of the economy is shrinking. If you have the insights and skills to pick such investments they should represent a small part of your portfolio even during the darkest days of a recession.

How to Protect Your Investments from a Recession PPT

How Will Higher Interest Rates Affect Your Investments?

The US Federal Reserve Open Market Committee raised interest rates again last week by a quarter of a percent. How will higher interest rates affect your investments? There are several ways that that higher rates will affect your portfolio both immediately and over the long term. Here are a few thoughts on the subject.

Immediate Effects of Higher Interest Rates on Your Investments

  • U.S. Treasuries
  • Corporate Bonds
  • Dividend Stocks

U.S. Treasuries and Corporate Bonds

If you currently have U.S Treasuries, AA, or AAA corporate bonds in your investment portfolio, they just became a little less valuable when the Fed raised rates last week. And, if the Federal Reserve follows through with its projections and raises rates twice next year, these investment vehicles will become progressively less valuable. However, if you simply hold your bonds or Treasuries to maturity, you will not lose money on these investments. And, if you wait for higher rates, you will be able to purchase these bonds and treasuries and earn higher interest rates. Ideally, you will buy these when rates peak. Then you will be earning a good interest rate and your bonds or treasuries will become more valuable as rates start to fall.

Dividend Stocks

Dividend stocks like utilities are often considered to be proxies for bonds. So, when rates go up but dividends do not, dividend stocks lose value. Providing that the basic business of the dividend stock does not change, such as with a utility, these investments will perform like bonds and Treasuries. But, if higher rates usher in a recession, many now-strong dividend stocks may take an earnings hit as well. Over the long haul the value of these investments will depend on their intrinsic stock value, in which case the effects of higher interest rates on the general economy will be important.

Longer Term Effects of Higher Interest Rates on Your Investments

CBS News writes that the U.S.’s interest payments are about to skyrocket. This is a big deal because it affects all sectors of the economy, government, and personal finances.

A recent Moody’s analysis noted that persistent high debt, among other factors, would lead to “persistent deterioration in the U.S.’s fiscal strength over the next 10 years.”

High federal borrowing could also crowd out other types of investment. The federal government borrows money by issuing treasuries; the investors who buy them are effectively lending to the government. A very high supply of treasuries could effectively starve other parts of the economy of investors’ money, some analysts say.

“If you issue more and more treasuries, the dollars you use to buy them need to come from somewhere. They could have gone into the stock market, or into other investments,” according to Torsten Slok, chief international economist at Deutsche Bank.

In the article they show a graph from the Office of Management and Budget showing the expected huge increase in payments on U.S. debt.

As the number of US dollar available for investment dwindles the US will not be the first country affected. Emerging markets are already suffering and there is the prospect of massive business failures in China this coming year. Despite Trump’s America First rhetoric, this is an interconnected world and trouble offshore will come back to bite the USA in the proverbial backside as well.

 

Interest payments on US debt will more than double in the coming years due to higher interest rates. How will higher interest rates affect your investments?

Interest Payments on US Debt

 

The US debt is already huge and due to the Trump tax cuts it is going to be a lot bigger. What is really worrying, however, is the size of the debt compared to the US gross domestic product, GDP. The game plan with recent tax cuts was that the resulting economic stimulus was going to raise GDP above 4%. That has not happened despite lower unemployment rates and, until now, a surging stock market. Many point to higher interest rates and their fallout as a reason that the stock market is getting bearish.

 

To understand how higher interest rates will affect your investments it is useful to look at the US debt and US GDP

US Debt and US GDP

 

More Rate Hikes on the Horizon

Bloomberg writes that we are not going to see the death of rate hikes just yet.

Money markets appear to have completely nixed the idea of Federal Reserve interest-rate hikes in 2019, although the outlook may not be so simple.

As the Fed jacked up rates by a quarter of a percent in their most recent meeting, predictions of no more rate hikes seem to have been more wishful thinking than not.

The Fed is famous for thinking long term and is almost continually at odds with the short term political concerns of congress and the U.S. president. Too-low interest rates have an effecting of distorting markets. Real estate prices escalate because folks can buy more for their dollar due to the lower cost of servicing their debt. Investors tend to bid up stock prices and overheat the stock market. As Investopedia notes, the effect of interest rate changes can take up to a year to be felt.

Interest rates affect the economy by influencing stock and bond interest rates, consumer and business spending, inflation, and recessions. However, it is important to understand that there is generally a 12-month lag in the economy, meaning that it will take at least 12 months for the effects of any increase or decrease in interest rates to be felt. By adjusting the federal funds rate, the Fed helps keep the economy in balance over the long term.

However, the stock market continually seeks to predict the course of the economy and the value of investments. And the stock market has been very volatile and in correction mode. How higher interest rates will affect your investments will be largely negative over the short term as rates go up and the costs of borrowing rise. Over the longer term the risk is tied to the drag on the US economy and US investor caused by an ever-increasing US debt burden as more and more of the results of US productivity are eating up by servicing the debt.

Is there a place to hide as this scenario plays itself out? If you like cash positions when the market is volatile, a smart move is to build a “ladder” of short term AA or AAA bonds or US Treasuries. A bank account is also protected by Federal Deposit Insurance. Then the issue is predicting a market bottom, providing that there is one as the long term effects of mounting US debt play out.

How Will Higher Interest Rates Affect Your Investments? PPT

What Investments Should You Choose Right Now?

There is always a risk in giving or receiving investment advice. Many times do we read that an expert is making suggestions based on “what their charts show.” There may be useful information in their research but there is also a huge fudge factor. This is because the “expert” is not really giving you specific advice but only relaying what their “chart” might be predicting. Meanwhile, as the market is heading downward every day, you are wondering this, what investments should you choose right now?

General versus Specific Investment Advice

General investment advice, when it as some value, is based on past performance. For example, money invested in the US stock market and left there over time tends to out-perform other investments such as bonds, real estate or bank deposits. So, is it good general advice to invest in stocks? Yes, it is. But, in order to correctly follow this advice you need put money in an index fund that follows the S&P 500 or perhaps the Dow Jones Industrial Average. And, you need to leave it there through good years and bad. This is because individual investors are typically not very good at timing the market.

An interesting article in The Balance shows us 20 years of stock market returns by year.

Negative stock market returns occur, on average, about one out of every four years.

Historical data shows that the positive years far outweigh the negative years. The average annualized return of the S&P 500 Index was about 11.69 percent from 1973 to 2016. In any given year, the actual return you earn may be quite different than the average return, which averages out several years’ worth of performance.

To benefit from the long term growth of US stocks you need to stay in the market for at least five or ten years. This is how many years you need to stay with an investment to make it long term. So, what investments should you choose right now based on this advice? You should pick a broad-based index fund that follows the S&P 500 or Dow, add to your investment on a continuing basis and stay with the investment through thick and thin. Based on past experience, your investment will out-perform others over the years.

What Investments Should You Choose Right Now to Avoid Losing Money?

Maybe the thought of watching your investments fall in value by another twenty or thirty percent is a bit too much. And, maybe you are not so sure that the market will come back very fast once it gets done correcting. If this is the case, you are looking for ways to invest without losing any money. Bank deposits are protected by Federal Deposit Insurance. US Treasury bonds, notes, and bills when help to maturity will return you investment plus interest. Likewise, AAA and AA bonds are good ways to invest and protect your capital. However, none of these investment options compares in return over the years with the US stock market and well-chosen stocks.

Choosing Specific Investments Right Now

An ETF that tracks the S&P 500 will provide a good rate of return when held for five, ten, or more years. But, there are stocks that will outperform the rest. How to you choose them? The key is to apply the concept of intrinsic stock value. Successful investors who apply this approach are always looking for profitable stocks to invest in. They look for companies whose business models are clear and likely to provide good returns over the coming years. These investors do not necessarily buy those stocks right away. Rather they wait for a stock market correction. The company they have chosen already has an intrinsic value greater than the market price of the stock. Then, with the correction, the stock becomes more of a bargain.

A solid long term investor will typically have several promising stocks on his buy list. But, he or she will only purchase those stocks when the current price is substantially less than the intrinsic value price. Then the newly purchased stock provides a forward-looking income stream and profits for years and years.

Specific Stocks Suggested by “Experts”

Forbes has an article suggesting that you “hold your nose” and buy US stocks. They allude to the futility of trying to time the market and the value of long term investing.

If your investment horizon is over two years for investing your money, don’t sell! You will just set yourself up for the impossible task of winning a market timing contest, and realizing losses. History demonstrates that it’s better to stay in the game so you don’t miss the short periods when stocks sharply recover.

The specific stocks suggested in this article are not the high tech darlings that are household names. Rather they are companies that routinely make money and are somewhat undervalued compared to their current market price.

United Rentals: down 40% this year
People’s United Financial: Down 16% this year

These may be good suggestions but we strongly advise that rather than acting on these stock tips that you carry out your own fundamental analysis before buying and holding for the long term.

Are There Stocks You Should Sell Right Now?

This gets us back to intrinsic value as a guide to stock investing. There are stocks with great names and traditions that are no longer stellar long term investments. Kodak was a prime example. They invented the personal camera, camera film, and commercial film developing. For much of the 20th century dominated the market and then digital cameras came along and Kodak’s business model no longer worked. IBM was the king of big central computers and took a big hit from the invention of the PC and faster chips. IBM was able to transition into other parts of the computer world but they are no longer the company whose stock you should never sell. Whether the market is going up or going down, when you have a company whose business plan no longer works and whose stock value is being propped up b stock buybacks, you should probably sell and avoid future pain as the stock slides into oblivion.

What Investments Should You Choose Right Now? PPT

Defensive Investment Strategy for 2019

As the year ends and investors celebrate the holidays with family and friends, the stock market is deep into correction territory and the real estate market may not be very far behind. The suggestion one hears from all sides is that it is time to adopt a defensive investment strategy for 2019 and perhaps beyond. But, just what is a defensive investment strategy? When should you go defensive? And when will it be time to get aggressive again? First, here are some thoughts about going defensive for the coming year.

Defensive Investment Strategy for 2019

As a practical matter, what investments should you look at to protect your portfolio into the next years? Kiplinger suggests 7 strong buy defensive stocks for 2019.

Companies from sectors such as health care and consumer staples offer goods and services that people need no matter what the economy is doing, which leads to more reliable revenues and profits. Still, even outside those sectors, there are a few resilient blue chips that either dominate their market so completely or offer such diversified product lines that they can hang in most market environments. These are the kinds of stocks investors want to pile into.

Here are their seven suggestions.

  • Dollar General:  Discount retailer
  • Waste Management: Largest North American “environment solutions” provider
  • Canadian Pacific Railway: Solid, well positioned Canadian and US rail system
  • Estee Lauder: Consumer products company in makeup and beauty products
  • Boston Scientific: Well-positioned medical device maker
  • Deere: Agricultural machinery giant
  • Centene: Largest managed care company in Medicaid sector

All of these investment suggestions have a strong defensive aspect but how do you go about choosing your own defensive investments?

 

Buying stock in the Canadian Pacific Railway is a good defensive investment strategy for 2019

Canadian Pacific Railway

 

Picking Your Own Defensive Investment Strategy for 2019

Investopedia explains the concept of a defensive investment strategy used to reduce the risk of losses in a down market.

A defensive investment strategy entails regular portfolio rebalancing to maintain one’s intended asset allocation; buying high-quality, short-maturity bonds and blue-chip stocks; diversifying across both sectors and countries; placing stop loss orders; and holding cash and cash equivalents in down markets. Such strategies are meant to protect investors against significant losses from major market downturns.

As we can see, there is more to a defensive investment strategy for 2019 than just picking different stocks. As we mentioned in our article about how to invest without losing any money, US treasuries, AAA bonds, and a bank account with Federal Deposit Insurance are all safe bets. On the other hand, in a volatile market that is losing ground, there comes a point at which you should be looking to buy instead of sell. We recently asked if you should sell or buy when investments are volatile. The solid basis for choosing stocks in a down market is intrinsic stock value. When the market is in a panic everybody sells everything just to get out and stop the losses. But, there are stocks that have a good forward-looking income stream in any market. (Years ago we wrote about investing in beer.) finding these companies may take a little homework and you may throw out many that you look at as too difficult to call. But, when you correctly implement a defensive investment strategy for 2019 you will be well-positioned to take advantage of the next upswing in the market.

How Far Will the Market Fall?

One of the valid concerns at this point is that the stock market may have already run its downward course. If that is the case, it is not time to see but rather time to start picking up bargains. On the other hand, the trade war may go on forever, the dark comedy routine that is the US government with its recurring shutdowns may get worse. The Mueller investigation into Russian meddling in the US electoral process seems to be getting closer and closer to the President. The ever-mounting US debt will eventually require a devaluation of the US dollar, extraordinary inflationary measures by the Federal Reserve, of end up in long term damage to the US economy. Which direction will these issues take the market and how far will it fall in the next year or years?
The things to watch are earnings and employment. No matter what is happening in Washington, with the trade war, or with a volatile stock market, the intrinsic value of stocks is tied to forward-looking earnings and those earnings are tied to people having jobs and money to spend. The longer term will be governed by earnings. Use the stocks suggested by Kiplinger as a guide. Do your own fundamental analysis to choose investments for your own defensive investment strategy for 2019.

One More Defensive Investment Example

The Motley Fool looks at General Mills as an undervalued dividend stock with a 5% yield.

As concerns about tariffs and rising interest rates hammer the markets, many investors are pivoting toward defensive stocks that withstand market downturns better than higher-growth stocks. Packaged foods giant General Mills (NYSE:GIS) is usually one of those stocks but its 35% decline this year likely spooked conservative investors.
However, that sell-off reduced General Mills’ forward P/E to 12 and boosted its forward dividend yield to 5.2%. Do those figures indicate that it is now an undervalued income stock that has finally bottomed out?

General Mills is famous for the Betty Crocker brand of package baking products. Your mother and grandmother certainly baked Betty Croker cakes and muffins and used General Mills or Pillsbury flour when baking “from scratch.” Unfortunately for the General Mills business model, women rarely bake any more that the balance work outside the home with family chores. This fact is a detriment to the long term General Mills business model.

When you look at old stalwarts like General Mills and see that their stock has dropped in value, you need to ask why and make sure that you are not buying into a company whose long term business model as it risk. After all, it is profits and long term cash flow that give an investment its long term intrinsic stock value and not its well-known brand name.

 

General Mills and Betty Crocker were household names a couple of generations ago but is is General Mills part of a sound defensive investment strategy for 2019?

General Mills and Betty Crocker

Defensive Investment Strategy for 2019 PPT

Pros and Cons of Infrastructure Investing

With the Democrats in control of the House of Representatives for the next two years a consensus may be reached to fund upgrades in the sorry state of US infrastructure. This issue needs to be addressed but has repeatedly been pushed back due to political fights over attempts to repeal the Affordable Care Act or fund a big wall between the USA and Mexico. Assuming that funding goes through to repairs roads and bridges, water treatment and the power grid, or rail links and airports, what are the pros and cons of infrastructure investing. And, where would the best places be to invest? Here are three different opinions on the subject.

Infrastructure Stocks

Market Watch has specific suggestions for infrastructure stocks.

The American Society of Civil Engineers gave America’s overall infrastructure a D+ in its last annual infrastructure report card. That’s a nationwide grade, and includes a D+ for wastewater infrastructure and a D+ for energy infrastructure among other categories; rails were graded a B, the only grade above C+ across 16 categories, and zero A grades were awarded.

Assuming that funding goes through, here are five concrete investment suggestions.

Aecom: Construction and engineering focusing on design, financing, and related services, specializing in infrastructure projects

Caterpillar: This company is the world’s largest maker of construction equipment. It designs, manufactures, and sells its equipment through a global network and provides customers with financing and insurance to support sales. This stock is a bellwether of the American and global economy and a sure bet to prosper in an era of increased infrastructure spending.

Nucor: This steel maker is likely to benefit from any funding to rebuild bridges, rail links, or any project requiring steel.

Martin Marietta Materials: This company produces and sells construction aggregates (sand, gravel and crushed rock) and other building materials. All of these materials are essential for rebuilding or repairing roadways as well as bridges.

U.S. Infrastructure ETF: This infrastructure-related ETF is focused on the USA and about half of it is focused on electric utilities.

There are many other possibilities and each and every one needs to be considered  on its own merits depending on where funding is directed.

Is This Truly the Time to Invest in Infrastructure?

Now that you have a few suggestions for investing in infrastructure you need to look at intrinsic stock value. Will 2019 be the year of renewed infrastructure spending? And, will that truly result in profits for various companies and higher stock prices? JPMorgan questions if this is the infrastructure moment.

Institutional investors have been allocating a growing share of their portfolios to infrastructure assets-including regulated utilities, transportation and contracted power. The focus has been on core investment strategies, which can produce stable, forecastable cash flows through the use of prudent leverage and some combination of transparent and consistent regulatory environments, long-term contracts with credible counterparties, and mature demand profiles. Most core infrastructure assets have monopolistic positions in the markets they serve, so prices and usage are relatively insensitive to periods of economic weakness. Instead, core infrastructure investments are driven by a different-and uncorrelated-set of factors, including political and regulatory risk, development risk, operational risk and leverage. Also, each core infrastructure sector has unique risk factors, so core strategies include investments from multiple sectors to reduce volatility within the asset class.

They note three factors that make infrastructure investments attractive, diversification, protection from inflation, and stable and high yields. Of the pros and cons of infrastructure investing, these are the positives. Another positive for many of these investments is that they are easy to understand with basic and straightforward business models.

The Dark Side of Infrastructure Investing

The Brookings Institute writes that infrastructure investing requires careful evaluation. They provide a graph showing the dismal decline in US infrastructure spending.

 

To get an idea about the pros and cons of infrastructure investment start by checking out US infrastructure spending from 1985 to 2015

US Infrastructure Spending 1985 to 2015

 

There is no question that the USA needs to upgrade its infrastructure pretty much across the board. The fly in the ointment is what projects get funded and will they be “roads to nowhere” in the districts of powerful representatives and senators or “best bang for the buck” projects that provide the most benefit for the common good and the best rest return on investment for individual investors. This is the negative side of the pros and cons of infrastructure investing.

While the discussion of the administration’s infrastructure plan has revolved around a $1.5 trillion spending goal, only $200 billion would be in the form of federal spending. In addition, there are other places in the budget where spending on transportation is cut, making the net new federal investment possibly much smaller. Moreover, it is not clear that the leverage sought for the $100 billion of matching funds could realistically be achieved. State and local governments would have a strong incentive in their grant applications to create “new” revenues that would qualify for matching grants, and that would be offset by revenue reduction elsewhere in their budgets.

Much of this discussion is reminiscent of the early Obama administration during which funding projects were envisioned only to be drowned in red tape and political infighting on the federal, state, and local levels. A valid concern is that we end up with lots of “pork barrel” projects benefitting the districts and states of the powerful in Washington and of little value the public or to interested investors.

Another concern with the administration’s matching funds proposal is the minimal consideration it gives to cost-benefit analysis of new investments. Only 5 percent of federal evaluation criteria are allocated to “evidence supporting how the project would spur economic and social returns on investment.” Instead, the administration’s selection criteria focus on whether states generate new revenue sources for infrastructure, meaning that projects may be selected based on funding options in the states, not the overall national benefits. By giving preference to revenue sources-including private capital-over social benefits, the proposal may reallocate infrastructure spending away from socially important projects that are true public goods and are not attractive to private investors.

All told, 2019 may be the year that infrastructure spending comes to the fore. The chore for investors will be to do diligent fundamental analysis of specific investment opportunities based on their realistic chances of profit as spending works its way into real projects in the infrastructure sector.

If you need to consider the pros and cons of infrastructure investing start with the Minneapolis I 35 bridge collapse.

Minneapolis I 35 Bridge Collapse

 

Pros and Cons of Infrastructure Investing PPT


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