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Profitable Investing Tips has been a member since April 20th 2008, and has created 155 posts from scratch.

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How Do You Choose Which Assets Classes to Invest In?

You have enough money to start investing. But, before you consider how to start investing in the stock market, you want to get your financial house in order. Our article on that subject suggests that the first thing to do is pay off your credit cards and the second is to buy your own home. Once you have a rainy day fund in the bank for emergencies you want to consider investments. The stock market is a good choice but it not the only one. What other asset classes are there? Stocks, bonds, short term investments (cash), and real estate are the basic four. But, how do you choose which asset classes to invest in? Let’s look at each of the big four and then commodities (gold).

How Do You Choose Which Assets Classes to Invest In: Stocks

Stocks have two basic things going for them. Over the years the US stock market has outperformed real estate, bonds, and money in the bank. And, the stock market offers liquidity that real estate investments lack. You can buy a stock one day and sell it the next. Try doing that with a piece of real estate! So, why shouldn’t you put all of your investment capital in stocks? If you remember the 2008 stock market crash, the dot com crash, or the various other market crashes going back in time you can see that there can be risk in investing in stocks. There are ways to deal with that risk such as by choosing a range of stocks instead of just one or two and learning to assess intrinsic stock value as a guide to profitable investing.

How Do You Choose Which Assets Classes to Invest In: Bonds

We discussed treasury and corporate bonds in our article entitled how to invest without losing any money.

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.

The same approach applies to AAA corporate bonds issued by Johnson & Johnson or Microsoft. These asset classes do not outperform the S & P 500 over the years but they do outperform a lot of individual stocks. If want you want is to keep your money safe, not lose any, and make a decent rate of interest along the way, bonds as an asset class are a good addition to any investment portfolio.

How Do You Choose Which Assets Classes to Invest In: Cash and Short Term Investment Vehicles

If you believe you will need your money fairly soon, you do not want to tie it up in stocks, long term bonds, or real estate. Any of these asset classes may go into a slump and that would mean that you lose money when you take your cash. A good way to get a little interest on your money is to create a ladder of short term bonds or even CD’s at your bank. You will always have cash available when needed. This asset class does not outperform any of the others but it is the most flexible. There are a lot of smart investors who hold cash when they do not trust which way interest rates, the stock market, or real estate prices are going.

How Do You Choose Which Assets Classes to Invest In: Real Estate

Your own home is the real estate investment that you need to make first and foremost. Long term real estate investment is a skill that needs to be developed over the years and hopefully not by losing money along the way. If you want to take advantage of profits from real estate and not sink all of your money into a piece of property, consider REITs which are real estate investment trusts. These are investments you can get  into for a reasonable amount of money and get a good return. And, you do not need to manage the property yourself!

How Do You Choose Which Assets Classes to Invest In: Gold

Gold bugs think that sooner or later all paper currencies will be worthless. Thus, the only way to retain any value for the future is to hold precious metals. The problem with gold is that it does not pay a rate of interest and its price goes up and down. If you want to have a little gold as a reserve, just in case, there are to viable approaches. One is to simply wait for the price of gold to plummet and then buy. The other is to use cost averaging. Buy the same dollar amount of gold every month or so. Gold is a valid hedge against catastrophic economic and social events but the S & P 500 has been a better choice over the years.

Importance of Not Losing Money When Investing

The bull market is aging and a potentially damaging trade war is ramping up. With investment risks in mind, we have written a lot recently about investing without losing money, what criteria to choose investments, safe investments for retirement, and the risks of offshore investing. A recurring theme has been the importance of not losing money when investing. One does not need to look any farther than a Warren Buffett quote to understand the importance of this subject. The Oracle of Omaha said that the first rule of investing in not to lose money and the second rule is not to forget the first rule! When the market is going up, why is it important to think about not losing money? It is all in the arithmetic.

Importance of Not Losing Money When Investing: The Arithmetic

If you have an investment that routinely appreciates at 10% a year, you should be happy. Let’s assume that this is a stock that does not pay dividends. The value per share just goes up 10% year after year. If you started with $10,000, where does that get you at the end of each year?

Exponential growth of a sound investment

  • Year 1: $11,000
  • Year 2: $12,100
  • Year 3: $13,310
  • Year 4: $14,641
  • Year 5: $16,105.10
  • Year 10: $25,937.42

This is a nice return on investment. But, what if, rather than a 10% gain every year, there are some losses thrown into the picture? What kind of rate of return do you need the next year to make up for one year losses of 10%, 20%, 30%, 40% or 50%?

Rate of return needed in one year to make up for losses in the preceding year

  • Loss = 10%, required return the next year = 11.11%
  • Loss = 20%, required return the next year = 25%
  • Loss = 30%, required return the next year = 42.86%
  • Loss = 40%, required return the next year = 66.67%
  • Loss = 50%, required return the next year = 100%

The obvious point of this little arithmetic exercise is that if you lose money on an investment, you have less money to work with. Thus, you need a higher return on investment to get your original investment back. And that simply assumes that you are back to ground zero. Forget about that original year after year exponential growth! Buffett is a smart guy, but to understand his advice, you only need to do the arithmetic.

Importance of Not Losing Money When Investing: What Are Your Options?

If you had simply put your money in CD’s at the local bank in the days leading up to the 2008 stock market crash you would not have lost any money. But, if you had left your money in CD’s you would have experienced a period of historic low interest rates. The ideal solution would have been to pull your cash out of risky stocks when the market looked suspect and then re-invest when the market bottomed out. But, how would you know?

Intrinsic Stock Value

Perfect market timing is impossible. But, there are general principles that help an investor decide “when to hold em and when to fold em” to quote Kenny Rogers and The Gambler. An approach invented by Benjamin Graham is called intrinsic stock value.

The dictionary definition of intrinsic stock value is its fundamental value. It is obtained by adding up predicted future income of a stock and subtracting current price. It can also be seen as actual value of an equity versus its book value or market value. The concept of fundamental analysis of equities evolved from this concept. Using fundamental analysis the intrinsic value of a stock is the expected company cash flow discounted to current dollars. It is a discounted cash flow valuation.

Successful long term investors do not bet on the stock market. They only invest in a company when they understand its business model and when they can reliably predict that the business model will create profits into the indefinite future. There were successful long term investors who simply got out of the stock market in the run-up to the 2008 crash. And, there were those who simply stayed in the market and rode the subsequent bull market to increasing gains over the years. The key to their approach is understanding how the company makes money and how its approach will continue to work, or not, over the years.

Importance of Not Losing Money When Investing PPT

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.

Picking Safe Investments for Retirement PPT

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.

Most Reliable Criteria for Picking Investments PPT

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.

What Are Today’s Foreign Investment Opportunities? PPT

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