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About Profitable Investing Tips

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

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How to Protect Your Retirement Savings before the US Economy Implodes Again

Far too many investors were essentially wiped out in the 2008 economic collapse. Those who got back into the stock market and invested well have ridden a historic bull market to impressive gains. The real estate market has also largely recovered and benefitted those who bought when prices were at a rock bottom. But, no bull market lasts forever. We saw a little bit of that prophecy come true in the last couple of weeks as stocks corrected impressively. In this article we are not so much concerned with how far the market will rise again or how quickly it will correct again. We are wondering how to protect your retirement savings before the US economy implodes again. Why are we asking this question?

Adding on to the US and Other National Debts

US News warns that a crisis is coming. They warn about asset price bubbles, mispriced credit and excessive debt on a global scale.

Another key ingredient for a global economic crisis is a very high debt level. Here too today’s situation has to be very concerning. According to IMF estimates, today the global debt-to-GDP level is significantly higher than it was in 2008. Particularly concerning has to be the fact that far from declining, over the past few years Italy’s public debt has risen now to 135 percent of GDP. That has to raise the real risk that we could have yet another round of the Eurozone debt crisis in the event that we were to have another global economic recession.

Today’s asset price bubbles have been created by many years of unusually easy global monetary policy. The persistence of those bubbles can only be rationalized on the assumption that interest rates will remain indefinitely at their currently very low levels. Sadly, there is every reason to believe that at least in the United States, the period of low interest rates is about to end abruptly due to an overheated economy.

High interest rates will choke off the US economy even as tax cuts may be providing a temporary boost. In addition, Seeking Alpha has a good article about America’s impending debt crisis and how it will end badly for stocks.

The U.S.’s enormous spending addiction has created a massive debt bubble that is going to lead the economy to its next financial crisis.

Consumer, government, credit card, auto loan, mortgage, student loan and just about any other debt you can think of is at a new record – and it won’t end well.

America’s impending debt crisis is likely to materialize within the next few years, and when it does, its destabilizing effects will be felt deep throughout the financial system.

So, how do you protect your retirement savings before the US economy implodes again?

Income versus Growth

Along the way to retirement you want to see your portfolio grow. Certainly if you invested in tech stocks like the FANG darlings in the last years you have been successful. However, with growth comes risk which is what you want to avoid when you are no longer drawing a paycheck. Dividend stocks with an unbroken history of payments are ideal. Utilities are an example of stocks that produce a steady and reliable source of income over the years. If interest rates go up the price of a utility stock will often fall but the dividend will typically remain the same and because you want income during retirement that is what is important.

Fundamental analysis is crucial to success in picking investments that will weather an economic storm. What can you expect from each and every investment in the case of a major economic downturn? And how can you prepare? Your home may have appreciated in value since the crash. If you are planning on downsizing for your retirement years it might be wise to make that move while the economy is still OK and then put your excess cash to work in a ladder of short term bonds or a well-chosen dividend stock.

Are Tax Free Municipal Bonds a Good Idea?

For years a tried and true investment was a tax free municipal bond. If you were in a high tax bracket you could write off your federal taxes and sometimes even your state and local taxes on the interest gained. With a carefully chosen bond you could get a better return than with a US Treasury. And in an era when the top tax rate was 89% it made perfect sense to go the tax free municipal bond route. Now there is talk of fixing America’s ailing infrastructure using seed money from the federal government and bonds issued by state and municipal governments. Are tax free municipal bonds a good idea today? Especially are they a good idea when interest rates may be going up while states are strapped with debt?

How to Invest in “Munis”

Years ago we wrote about how to invest in municipal bonds AKA “Munis”.

Municipal bonds are an attractive investment for many and can be invested in by buying individual bonds, shares of bond funds, or shares of unit investment trusts. How to invest in municipal bonds may vary with how much money the investor has to invest and his or her level of income. Tax free municipal bonds are typically more attractive to high income investors.

The two types of municipal bonds are general obligation bonds and revenue bonds. General obligation bonds are sold to cover expenses of states and municipalities. The taxing power of the issuing authority is your protection against default. Revenue bonds are what are issued for infrastructure projects. And revenue from the project such as tolls for roads or bridges provides the income stream to pay interest and eventually principle on the bonds.

Creditworthiness

Be careful when investing in municipal bonds, tax free or not. Some municipalities and states are so strapped for cash that not only repayment of the principal but also payment of interest may be at risk. Standard & Poor’s and Moody’s provide credit ratings where Aaa and AAA are ideal ratings and D, DD or DDD are for bonds that are in default. Tax free municipals are not a good idea if the issuer is in default.

Where Are Interest Rates Going?

Municipal bonds are long term instruments. If you put all of you investment into a bond today and interest rates go up you will be stuck with an interest rate that is less than the current market and that will last for years. An approach that long term bond investors take is to create a bond ladder. They invest a set amount each year in bonds, hold to maturity, and reinvest when the bonds mature. This passive approach to bond investing provides a long term income stream and an average interest rate over time.

What Is Your Tax Bracket?

If you are in today’s top tax bracket you will pay 39.6% federal tax on the last dollar of adjusted gross income for a single person. In 1963 you would have paid 53%. But back in the 1960’s a person with an adjusted gross income of $10,000,000 would have paid 89% on the last dollar earned. Today the rate does not keep going up after a single person makes half a million. The point of these numbers is that tax free municipals were a great idea for folks in the really high income brackets for much of the 20th century up until the Reagan tax cuts in the 1980s. Today you need to take out paper and pencil and calculate how much of a benefit you will gain from having the last dollar you earn be tax free from federal taxes and perhaps from state taxes.

Three Ways to Protect Your Investments in a Bear Market

Stock markets across the globe plunged at the beginning of the week . They recovered somewhat and then resumed their slide today. More and more analysts are saying that a bear market is on the doorstep. CNBC warns of a big bear market.

The dramatic stock market sell-off earlier this week should be viewed as a turning point, according to analysts.

“Our ongoing concerns about the recovery’s tenure have been thrown into sharper focus by the steepest market sell-off since the credit crunch,” Eoin Murray, head of investment at Hermes Investment Management, said in a research note published Thursday.

On Monday, the Dow dropped 1,175.21 points, having briefly declined more than 1,500 points during the session. And while U.S. stocks have since pared some of the losses sustained during a cascading market plunge earlier this week, the Dow, S&P 500 and Nasdaq are all down more than 4 percent since Friday.

If indeed a bear market is about to take hold what should you do? We offer three ways to protect your investments in a bear market.

Be Happy with the Profits That You Have Made

As a bull market comes to its end there are always investors who want to eke out that last little bit of profit. Because a dying bull market is often volatile those investor will wait for one last upswing before getting out. The problem is that too many investors wait too long and then see their portfolios evaporate as they wait for one last rally. The old saying is that you do not have a profit until you have taken a profit. If you got in or back into the market after the 2008 crash you have probably seen a very nice profit on your investments. If you agree that a bear market is in the wings, one of the ways to protect your investments is simply to sell part of your portfolio and hold onto cash until the correction or crash occurs at which time you can reinvest.

Crash-Proof Investments

Years ago we wrote about investing in beer. When times are good people drink beer to celebrate and relax and when times are bad people drink beer to drown their sorrows. Companies that brew and distribute beer are like companies that make and sell soap, household cleaners and other basic household necessities. When a recession hits consumer goods companies continue to make money. And their stock prices often go up because investors move their money out of stocks that are hurt by a recession and into stocks that remain stable. Another way to protect your investments in a bear market is to find crash-proof and recession-proof stocks.

Beware of Bonds and Stay Short

US monetary policy is about to tighten. Quantitative easing is gone and quantitative tightening is on its way in. The Fed will be borrowing less money and it lets its bond portfolio expire and rates are likely to go up. If you sell stocks or real estate because you fear a crash you may want to make a little interest on the cash you are holding. The problem is that you might get trapped in a low yield bond as rates go up so stay with short term issues.

How about Offshore?

We wrote recently about investing offshore. There are good reasons to diversify outside of the USA, especially with ADRs. But all markets are likely to fall if the US market crashed. For now cash is your friend as you evaluate investment opportunities for after the market bottoms out.

End of Bitcoin or an Opportunity to Buy?

Is this the long-predicted end of bitcoin or an opportunity to buy before the price skyrockets again? A couple of weeks ago we asked will bitcoin survive the crackdown. Governmental regulation has always been a background threat to cryptocurrencies as the feeding frenzy continues and we asked what should bitcoin be worth. Now, it would appear that investors are taking seriously the risk of governmental intervention and regulation. Reuters reports that the cryptocurrency selloff intensifies as bitcoin and others fall.

The currencies have come off their lows but analysts said the sell-off was probably not over.

This week’s slump brought the total market value of cryptocurrencies down to around $400 billion, half the high it reached in January, according to industry tracker Coinmarketcap.com. The market value of cryptocurrencies is calculated by multiplying the number of digital coins in existence by their price, although many question whether that is the right way to value them.

Bitcoin, the biggest and best-known cryptocurrency, fell as much as 15 percent on Friday to a two-month low of $7,625 on the Luxembourg-based Bitstamp exchange BTC=BSP. It clawed back some losses and was down around 4.1 percent at $8,623.50 in mid-morning New York trading.

The virtual currency is down by close to 25 percent this week and almost 40 percent in 2018.

The most recent threat of regulation came as India joined China and South Korea in threatening to limit or ban aspects of cryptocurrencies in their nations. The question is this just another setback from which bitcoin and the others will recover? That has certainly happened before and while the volatility in this sector has caused many to lose money, others have profited handsomely. The question really is if more governmental regulation will enter the picture and how that might affect cryptocurrencies. A useful way to look at this might be to consider bitcoin futures.

Coindesk reports that the US Commodities Regulator is strengthening is Bitcoin futures review.

The Commodity Futures Trading Commission (CFTC) is developing a “heightened review process” for cryptocurrency futures though it will continue to allow exchanges to self-certify products, Chairman J. Christopher Giancarlo announced last week.

Others have been scrutinizing the process as well, including some members of the U.S. Congress.

Yesterday, top Senate Agricultural Committee members sent a letter to Giancarlo requesting information on the CFTC’s oversight of bitcoin futures and options markets. The senators specifically requested information regarding the Commission’s market surveillance and its implementation of safeguards against bitcoin’s volatility.

“American taxpayers deserve strong safeguards against fraud, manipulation, and abusive practices in the futures and options markets,” the letter stated. “The CFTC plays a critical role in protecting customers and the markets from harm.”

A small amount of regulation may or may not hurt the value of bitcoin and other cryptocurrencies. But, the threat of increased regulation may be enough, for now, to drive investors out of the cryptocurrency market and thereby drive prices down. On the other hand outright bans on cryptocurrency trading across the globe could spell the end of the bitcoin feeding frenzy.

What Are the Smartest Investments for 2018?

As the year begins we all try to see the future and then invest accordingly. What are the smartest investments for 2018? Will the FANG tech darlings that have led the rally continue to lead? Should you be considering safe investment options in anticipation of a big market correction? Should you be looking for investments that are helped by the tax code overhaul? Long term investors always look for fundamentals and value. Forbes published its list of Top U.S. Stocks for 2018 and their explanations. Their picks from first to fifth are these.

United Health Group
Fedex
Viper Energy
T-Mobile
Microsoft

United Health Group

United Health Group started as an HMO in Minnesota. They broke up into a health care arm and a management arm years ago because the state of Minnesota did not allow HMOs to be profitable ventures. Then United Health proceeded to look at how health care was delivered, how it was paid for, where the savings could be found in the system and how to deliver services more effectively and cost efficiently. They then packaged those findings as services which they sold to other entities in the health care field. Over the years this company has bought its way into direct health care where it could be done for a profit and has become the giant in the field for healthcare-related information technology. No matter which way the sector goes this company will continue to grow and make money. We agree with Forbes that United Health Group is one of the smartest investments for 2018.

Fedex

Fedex is like United Health in that it has focused on improving its information technology and as a result made its business more effective and more profitable. The other part that makes Fedex attractive as the bull market gets more and more overpriced is that their business is tied to delivery of consumer goods. In the days of the California Gold Rush it was typically a better strategy to sell picks and shovels than to pan for gold. The combination of strong information technology and a tie-in to the consumer goods sectors makes Fedex one of the smartest investments for 2018.

Viper Energy

After hitting a low point below $30 a barrel the price of crude has slowly but surely risen over the last couple of years into the $65 range. There has been a lot of shaking out of inefficiencies in the energy sectors and in the oil fracking business especially. Viper is one of the survivors and well positioned in the Permian Basin to profit from more efficient fracking and higher oil prices. This makes Viper one of the smartest investments for 2018.

T-Mobile

We think that T-Mobile will be likely be profitable in 2018 but it is not necessarily one of the smartest investments. Its success is based on a change in how people will pay for their phone service. This sort of move is typically copied by competitors and then price competition sets in and decreases profits.

Microsoft

Don’t we all wish we had invested in Microsoft when it went public thirty years ago! But how could this mature company be a good bet for 2018? The key is that Microsoft has remade itself over the last few years. They are still an operating system provider but have moved into the cloud solutions business as the leader. This is similar to United Health and Fedex in using information technology to increase efficiency and profits and makes good old Microsoft one of the smartest investments for 2018.


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